I like to think about financial forecasting as being similar to a captain of a passenger aircraft. As I sit in my seat just before take-off to my favourite holiday destination, el capitano comes over the airwaves. He will tell us the expected journey time, the maximum altitude we will fly at and the length of time it will take and wind speed and direction. Roughly about half way through the flight, just as I’m tucking into my gin and tonic, the captain gives us an update. Air traffic control has been in contact to tell him the wind changed direction and there is a hold up at the destination. The captain has to change his original plan, he makes his tweaks and resets auto-pilot. Most of the time I’ve flown I get there at the time el capitano promised. The plan changed and yet the goal was still hit.
Financial forecasting involves creating a plan containing a set of measures, stuff that we think will happen. We then need to start doing what we said we would do and then check in with the original plan. If we find that we’re off-course in anyway we need to know how far off course. We can only know this if we have set out the milestones specifically. Otherwise, when we need to get back on course we will have no idea how to do it. Things change, thats the nature of business. Having a clear financial forecast of what we want to happen is our flight plan.
Integrated Financial Forecasting
Our financial forecasting connects together other business support services such as business planning and management accounting. We develop monthly management accounts with integration in mind. A key goal for us is to reduce duplication, since duplication is waste and we hate waste. With today’s technology there is no reason why the data in your accounting systems cannot automatically flow into your forecasts. I still work with businesses, some large companies, where all their accounting functions operate independently of each other. For example, the purchase ledger and banking are not connected. The potential for errors is huge. To be honest number of errors being made is huge, its just not necessary.
Profit & Loss Forecast
Creating a Profit & Loss Forecast (P&L) is a vital step in any financial forecast. The link between your cashflow forecast and your balance sheet forecast. The key metrics within your P&L are your Gross Margin, Total Overhead & EBITDA (Earnings before Interest, Tax, Depreciation & Amortisation).
These key metrics are essential to know to guide your business and ensure you are in control.