The Value of Forecasting

4 June 2015 8:51:27 AM NZST

Forecasting means that you know what your position is going to be in one, two and three years’ time. It may not be safe to project more than three years ahead. Aim at a three-year forecast.


The first thing you’ve got to do is know what you are committed to in your overheads.


You start with your salaries, your personnel. Then you look at your other committed overheads. Everybody knows what they are.


Then you look at your capital repayments, if they’re substantial.


Then you look at your own drawings and you allow for tax on your drawings.


And then you get down to a figure that is a commitment and that’s your costs for 12 months. Break them up month by month. In a lot of businesses month by month is pretty equal, but some businesses such as agricultural and farming businesses, are seasonal. So you have to allow for fluctuations throughout different quarters of the year, especially if you’re having to watch your cash flow.


Everybody has to watch their cash flow.


From your costs you gear what your level of sales has to be.


Take a conservative calculation or prediction of what your G.P. is expected to be, based on past knowledge, the present market, the present economy, and how much you think you are going to give away.


You have to predict or project based on a conservative G.P. There is no point in kidding yourself. The only way to accurately check your G.P. is to cost your invoices, if you can, on a weekly or monthly basis.


If you are in a stock business, do a physical stock-take regularly.


Then you can take out a proper set of accounts which gives you a very, very accurate gross profit.


If it is lower than expected, adjust it; if it’s higher than expected, keep the lower one as your projection – not only because you might have made a mistake, but you might run into a tough next quarter.


So that’s what is called forecasting.

Forecasting is absolutely critical so that you’re ahead of yourself. That’s all it simply means, you’re ahead of yourself – you know where you’re going to be in six months and twelve months’ time.


When you’re watching the figures monthly you know when things are going down, you know when things are going up and you can see whether you’re getting ahead.


If you’ve got an accurate forecast, then you measure it monthly; you could measure it weekly if you wanted to, in a very small business, but monthly would be the optimum.


If every business owner would commit themselves to doing that, they’d have a lot less worries. It would be a very effective management tool in increasing your profitability, because you’ll see what your actual position is conservatively ahead of the time, and you’ll know that you’ll have to take corrective measures when you’re falling behind.


Furthermore, you’ll know whether you’ve got surplus cash, so if there are commitments in the community, you know where you stand and whether you’ve got surplus. And if you haven’t got surplus, you’ll know what figure you must get to have a surplus.


Source: Silver Book: Sydney Seminar January 18 2012.

Posted in UBT Updates By

Erica Field