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Forecasting tips

Successful businesses don’t just live from day-to-day. They are always looking ahead, planning for next week, next month and next year.

Your business probably already does this, at least to a certain extent, particularly when you’re thinking about cash flow. You’ll be forecasting ahead, trying to anticipate when your working capital will be low so that you have time to find ways of boosting it.

Here are some useful tips to help you with your planning and forecasting.

1. Make time for forecasting every week

A key to accurate forecasting is consistency. By taking a few minutes every week to review and update your business forecast for the coming months, you’ll help to keep your finger on the pulse of what’s going on.

2. Have the right information available

While forecasting your income, costs and cash flow always involves an element of guesswork, you want to remove as many uncertainties as possible, to improve accuracy.

If you’re not certain of particular figures, but you know they are available from somewhere, take the time to find them. Better to invest a few minutes now than be faced with a major problem later because you misremembered something.

3. Avoid being over optimistic

It’s a proven fact that we usually predict things to turn out better than they often do. That’s one reason why so many new businesses fail; novice entrepreneurs put their hopes into a business plan without testing them against reality.

You can make the same mistake when forecasting sales or cash flow. Inject realism into your forecast by, say, looking at how long customers are currently taking to pay their bills and using that figure to work out how fast cash will arrive in the future.

4. Have a worst-case forecast

While you don’t want to be unnecessarily gloomy, you should be aware of what could happen if, say, a major customer failed to pay as expected. Or if they went out of business altogether, leaving large debts.

Having a contingency plan for dealing with problems like this will put you in a stronger position to survive them, and can help to reduce the stress of uncertainty.

5. Get a second opinion on your business forecast

Sharing your plans and forecasts with someone else gives you the benefit of another perspective.

They might ask you why you’ve made certain assumptions, making you think about whether they form a reasonable basis for your figures, such as your estimates for sales in the months ahead. It’s good practice to justify your assumptions because, as you think them through, you may realise that you’ve missed something.

A second opinion can also help give you confidence about the quality of your forecasts.

6. Learn from your mistakes

You will get your forecasting wrong from time to time. It might be because the unexpected happened, or you made in error in some figures. Perhaps you were over optimistic or simply forgot something.

What’s important is that you learn from these mistakes. Forecasting sales, costs and cash flow will always lead to a best guess, but do all you can to make it the best ‘best guess’ that you can.