Understand the best practices of forecasting and planning

Here are the 8 things you should be doing to build your business on best practice financial planning:

  1. Understand what you’re doing right now and make forecasting your friend – you should aim to create forecasts for revenue, cost of sales and running costs (overheads).
  2. Dig around your revenue to understand where it comes from – which clients, and types of clients, are buying which products or services, and how much revenue is from new or repeat customers?
  3. Identify which marketing channels any new customers or sales come through.
  4. Make sure you understand the profit margins on your sales – by subtracting the cost of sales (the direct costs of the product or delivering the service) from the actual sales total (invoicing).
  5. Look at your general running costs (overheads) in detail – understand every cost in your P&L and challenge its right to be spent.
  6. Properly understand your new business or marketing costs – which sales people generate how much business/profit, plus which marketing channels are generating both the leads and the new clients, and at what cost?
  7. Do a profit projection first – and then also prepare a cashflow forecast on the back of that.
  8. Tell yourself the ‘story of how’ – so often in planning, the only focus is the ‘what’, but that’s really only 10% of the plan. If you truly want to achieve your targets, you need to work through, capture and implement the ‘how’. This takes some commitment, but without the ‘how’, your plan is just a ‘hope strategy’.

Get to grips with scenario planning in uncertain times

The above pointers detail the steps for implementing best practice in normal trading conditions. But who’s experienced any of those recently?

However, that doesn’t mean that the months ahead are unnavigable – you simply have to plan for a variety of potential routes forward, and select the most suitable to follow as real results become evident each month.

If circumstances are ‘unusual’ for any reason, historical results may still be relevant to predict future performance. But it’s very important to have some mechanisms for providing a few ‘what if’ questions and, even more crucially, the answers to those questions.

This is where scenario planning comes into play.

A quick note of caution: this is also often where even the most experienced business owners can find themselves getting into a bit of a pickle. Because effective scenario planning requires real concentration, a good degree of compartmentalisation and an ongoing commitment to challenge the emotional thinking of your inner chimp.

The key to evading all of these potential pitfalls, of course, is focus and dedication to the task at hand.

How to look ahead and prepare for likely eventualities

Start by making sure you’ve got the groundwork in place (see above). Then adopt the following forecasting best practice – it will prove invaluable in helping you and your business plan for uncertain times:

When you’re managing a series of ups and downs, you need to have more than one and not more than three alternative scenarios to consider and build a plan around. In normal times, we would ordinarily recommend two plans. However, in uncertain times, it really helps to have Action Plan A (best case), Action Plan B (bearable case) and Action Plan C (worst case) all worked out in advance, ready to be referred to and implemented straightaway.

  • Work on one plan at a time, from start to finish, and cover the ‘what’ and the ‘how’. You need to compartmentalise each scenario and not mix them up. We’ve often seen business owners start with plan A, and in designing that, get distracted by elements of plan B and the final output is actually neither. For optimum concentration, consider working on Plan A on day 1, then working on Plan B on day 2, and Plan C on day 3. But don’t drag it out – get it all done in a week.
  • Keep nimble– you need a model that’s easily updatable as time progresses. Keep in mind that you need to be able to update and refine your plans regularly as new financial intelligence emerges. The best plans allow you to update actual figures as you go and flow that intelligence through the rest of your plans – so you can review and adapt your decisions quickly if/when you need to.
  • Develop a discipline of looking at your actuals every month, as soon as possible after the month ends. Don’t allow other people to design your rhythm – you set it, and then stick to it.
  • Don’t assume that underlying causes of revenue remain the same in all scenarios – they probably won’t be! If email marketing was your big lead generator in normal times, don’t assume it will be the same in uncertain times. If your average speed of converting a prospect was a month last year, expect different this year – if you provide PPE or outdoor heaters, for example, it may actually accelerate beyond your current capacity!
  • Recognise that it’s sometimes better to have someone else do your forecasting for you. Smart business owners know when to ask for, and bring in, professional help. Not only does this mean that an often-complex task gets done ‘right’, but it also frees them up to handle the more valuable activities that their MD role encompasses (and which they’re usually better at anyway).
  • It always helps to have someone else challenge and review your forecasts with you. Whether you do them yourself or not, an objective point of view will help you deal with the inevitable emotional repercussion (or denial) as we prepare forecasts for ourselves. Because if we’re being honest with ourselves, when we go into denial we ‘cheat’ and prepare the forecasts we want to see, rather than those that accurately reflect the scenario we’re trying to plan for. The beauty of scenario plans is they aren’t real – they’re a scenario; a mechanism through which to have a practice run before anything does become real (which it may never do anyway).It’s much easier to make decisions when we’re calm and not under pressure than when we’re stressed and firefighting. Scenario planning is simply planning in advance for ‘what if?’ outcomes. And if those scenarios do become reality, you’ll find it’s far easier to implement decisions you’ve already made for just those circumstances.
  • Consider ‘blips’ as they occur – is that outcome here to stay or is it actually just a blip? When we’re caught up in the moment, these blips can appear to us as the ‘new normal’, when maybe they aren’t. Suppose sales are down 30% one month, for example. You might rush to cut all your costs – despite the fact that your pipeline is healthy, with sales on the verge of closing, or perhaps you’ve got a cash buffer of 6 months. So, actually, everything’s still okay – you don’t have to shut the business just yet.
  • Build a good model once – a solid model you can re-use for years to come. This is easier said than done, of course, so really think about where your particular expertise lies. If it’s not in forecasting, it will be well worth a small investment to get someone significantly more experienced than you in this area to build and operate your forecasts for you.

Keep a close eye on your actuals from month to month

This advice on best practice in forecasting for uncertain times will undoubtedly help you keep your business under closer control over the coming months.

We sincerely hope you’ll be able to activate Action Plan A, or Plan B at least… But sometimes, of course, reality does bite – and you may be forced to reach for Plan C.

Whatever the circumstances you find your business in, know that you’re not alone – and that we’re here to support you. A highly proficient and efficient, yet part-time, YRH Financial Controller can make a massive difference to your business – as well as to your own sanity – so do consider giving us a call for a friendly (and free) chat at any time. We’ll be happy to talk you through how we could help.

To get started, why not download our free Financial Scenario Planning template? And be sure to give us a shout if you need any help working through it.

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