What is a Forecast?
We were astonished to learn recently when searching Google that over 6 million people in the UK were typing “what is a forecast?” into their search engines every month. This figure rose to 25 million a month on a worldwide basis.
Whilst the question should be taken at face value in many instances we would anticipate that there is also confusion between the actual difference between a Forecast and a Plan/Budget. All too often these terms have become interchangeable even when used by Accountants! But there is a major difference and it is important to understand this if you are to use the best tools to help your business succeed. Why spend the same amount of time and resources working with the wrong tools?
A Plan/Budget shows you how you think the future should look. Traditionally, a Plan/Budget is made at the end of your financial year to show you where you think you should be at the end of the following year. It is a rigid, goalpost approach which not only projects out by fewer and fewer months as your year progresses but could even be described as backward looking as focus turns to your variance from Plan rather than the future of your business. Furthermore, it has no ability to react to events as they occur. Poor Budgets/Plans also only focus on sales and profitability leaving out the most important aspect of business success: cash flow management.
Overall, a Plan/Budget is a much less powerful tool than a true Forecast as it lacks the information you really need to make important business decisions. It is essentially a “let’s check our financial performance every month to see how far off track we are without changing anything” approach.
A Forecast, however, shows how the future will most likely look. It is an up to the minute fact based approach with a forward focus. A Forecast uses actual data immediately it becomes available and uses this to forecast forward under various “what if” scenarios reflecting the real potential risks and opportunities within a business. It focuses on the likely impact from not only a profitability point of view but most importantly from a cash flow point of view and in turn, the impact on assets and liabilities. As a Forecast is flexible it is also more user friendly than a Budget/Plan as it saves time by adapting as events unfold. As time progresses a Forecast rolls forward so you continue to look forward by a year or more notwithstanding how close you are to your actual year end.
Overall, a Forecast is a much more valuable tool which enables better business decisions. It is a “let’s continuously monitor our business and make timely, well informed decisions” approach.
The difference essentially lies between a static and a continuous approach to your finances and, in turn, your strategic efforts. Often businesses know they would gain much more if they took a more forward looking approach but let the following challenges hold them back: not knowing where to start, a fear of letting go of old routines and a concern over collecting and analysing the right data in the right way.
Quality forecasts will not only benefit your business directly, by giving you a clearer insight into your finances, but will also provide any lender with improved business visibility and confidence making their decision to support you that much easier. We hope that helps but if you need any further advice on forecasting please let us know.