You can now use the latest apps and cloud accounting to analyse your books and forecast the future. Great! But how good are the results?
In Britain, we can view weather forecasts which have improved to the point where a three-day forecast is quite reliable. Less reliable forecasts are provided for up to fourteen days. Other countries have more stable climates, and long-term forecasts can be more reliable…
In business, different enterprises also have to deal with different climates. You may provide services on a monthly long-term contract; you may depend on passing trade which ebbs and flows. The issue is how to forecast your finances to suite the circumstances.
We can split current finances into three:
- Fixed Costs (Overheads) – commitments such as marketing, rent, admin staff, asset depreciation. These are called fixed as they are difficult to alter in the short term. They can be forecast by careful analysis of prior expenditure.
- Variables (Cost of Sales) – expenses for materials and workforce. These should be proportionate to the value of sales. In this case, they will increase or reduce to match sales. They can then be forecast by multiplying the average cost by the forecast sales.
- Income (Sales) – the cash inflow depends on the value sold and the timings of payments. A reasonably accurate forecast for the sales pipeline for the next few months is crucial to a successful cash flow forecast.
Our next question is when will the effects of the Coronavirus diminish? We have a few months of uncertainty remaining before we can expect anything approaching normality. In the meantime, we still need to plan our finances. I suggest two guidelines:
- You should make the best possible guess about the sales pipeline – both the timing of your workload and when payments will be received.
- You should avoid expenditure commitments which cannot be terminated if the expected sales do not materialise.
I would recommend you make use of the latest available tools/advice/intuition to extrapolate your future cash flows. You need a good combination of human and mechanical processes to create the foundations for growth and prosperity.