Most business owners rely on their Accountant to produce their year-end accounts before they look properly at how the business has performed. Perhaps they go one better and produce monthly management accounts which they may even review and scrutinise. But unless you have a stable and predictable business, how do you know if these are good or bad? Without a detailed budget forecast, you simply do not have a yardstick to measure against that will help keep you on track. If you have ever created a Business Plan, one of the key elements is a P&L Forecast, yet this powerful tool typically ends up in the same place as the plan itself; the proverbial bottom drawer.
If you have not done one before, creating a forecast is not rocket science and can be done using a simple spreadsheet. If you are an existing business, you can use your historic Accounts data to give you a head-start. Begin by creating the sales forecast and by breaking this down by new and existing customers. The main customers can even have their own entry, so you can monitor their sales more closely. Sales estimates can be informed from previous sales, order book, current quotes, sales intelligence and the marketing plan. You may also wish to breakdown by products or services. This will highlight how much reliance you have on your top customers and help to inform sales strategies for growth, customer relationship management and customer retention. If there is a gap between what you are forecasting and what you realistically want to achieve then you may need to revisit your sales and marketing plan and adjust it accordingly.
Next you need to input your costs of sales (breakdown if applicable) and the overheads. This will give you a financial model for your business. You may wish to scrutinise the existing costs to identify “quick wins” for cost savings and plan for changes to your cost structure based upon your business plan. So, you can now plan more confidently for that move to new offices, taking on new staff, or deciding upon the right marketing budget.
It is advisable to plan for some risk variation, so once you have your sales figures incorporate a separate column showing the effect of say 20% less sales or indeed 20% more. If you leave in your fixed costs and adjust your variable costs accordingly you can see the impact on your bottom line. If the plan looks too sensitive to these adjustments, then perhaps try to revise it accordingly. Once you have settled on a plan it is critical to review (at least quarterly) both the sales and cost elements. This should tease out underlying problems such as these actual examples; giving away too much discount, rework and rejects, customers going elsewhere, a problem in the sales team, rising supplier costs. You can always tweak your strategy and spending plans as you go along.
Once the model is established the percentages for costs of sale, gross margin, overheads and net profit can be used as a baseline to forecast future years figures based upon the business plan and to ensure that it makes commercial sense. Thus, for example a manufacturing business looking to relocate to bigger premises can create a forecast for the first year when operating at under-capacity and compare this to a forecast based upon full capacity. This would also take account of other factors such as skills availability, capital investment, working capital etc.
Don’t be derailed, step out of the tunnel and take control of your business by using this essential tool. Empiric Partners have worked with many clients to implement this and are on hand if you need us.