Business owners are busy running their business. Creating a plan for the coming year is not high on the list of priorities. A forecast is just guesswork anyway, so why bother? Projecting an increase in sales doesn’t make it happen!It’s true that a forecast doesn’t guarantee success, but how do you know if you have succeeded in business if you have never defined success for your business? When a runner starts on a marathon she may not be certain that she will finish, but she certainly knows where the finish line is and how to get there. Otherwise, her chances of success are pretty slim.
It’s the same in business. Your chance of succeeding is greatly reduced if you haven’t planned for success. That includes setting goals for the year and then figuring out what resources will be needed to achieve those goals. The forecast translates those goals and resource requirements into a measurable action plan. The forecast becomes a blueprint that guides day to day decision making. It influences your response to every new opportunity or setback during the year. At the end of the year you can evaluate what worked and what didn’t, and make an even better plan the next year.
Once you’ve decided to make a plan, how do you start? How much time will it take? If you have never done it for your business (or at least not since start up), then it could take some time. The good news is that it will be easier each following year. Also, you can reduce the impact on you and your business if you enlist a professional to help. Either way, here are the basic steps:
1. Set realistic goals. Most businesses set goals based on revenue or income, but goals can also relate to other factors like staff sizing, inventory turnover, operational efficiencies, debt reduction, quality improvement or some combination. The only requirement is that they are measurable and reasonably achievable (you don’t want to set yourself up for failure).
2. Determine what, if any, resources and actions are required to achieve the goals. This could include new hires, equipment, marketing, etc. Identify the costs and timing associated with each, and whether there are contingencies to consider.
3. Develop a financial forecast model that incorporates the goals and resource requirements. At a minimum, the model should include a P&L and cash flow statement so you know if your cash and credit lines are sufficient to fund the plan. (This is where you may want to enlist a professional with experience in forecasting. They will be able to do it faster and more accurately than you could.) The model does not need to be as detailed as your accounting system, but it should be detailed enough for you to measure your progress on key revenue and cost items throughout the year. It should also include a list of assumptions.
4. Use the process as an opportunity to question your expenses. Sometimes, we spend at levels based on prior years, without serious consideration whether a particular expense, or level of spending, is still appropriate for our business going forward. Where possible, check your ratios against industry norms. Is your sales and marketing cost in line with your competitors? What about the revenue per square foot for a store, or revenue per server for restaurant. Statistics are available for most industries. Not all businesses will conform to the norm, but it gives you a basis for understanding any variance.
5. Evaluate your progress against the model at least quarterly. You might make adjustments in the model as you go, but always keep a copy of your original forecast so that you can evaluate deviations at the end of the year and make adjustments the following year as appropriate.
A plan and forecast can be done any time of year, but the first quarter of your fiscal year is optimum. Let’s do it!
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