Why is Forecasting so Important to your Business?
Forecasting plays an essential role in the running of a business; from setting the direction in which a company will move, to giving a snapshot of the state of play in a firm. Reviewed and update regularly, a business’s accounts should be a active part of its corporate strategy.
The long and short of it: Essentially, there are two types of forecast: short term and long term. Both forecasts are equally important and complement each other accordingly. Looking at a defined period of time, for example 6 to 12 months, preparing a short term forecast should take into account a number of factors:
Forecasting should always look at sales strategy, understanding the company’s current position and recognizing where future revenue streams may lie. A firm’s operational strategy regarding its upcoming costs should also be factored in, as should the profits/losses and balance sheets.
Other elements to include are a firm’s cash flow and any funding in place or being sought. Depending on its market position and overall strategy, regular forecasts like this can shape how a company moves forward.
Forecasting in the long term gives a picture of where a company sees its strategy and sales figures progressing to in the next three to five years. For businesses working in partnership or with shareholders, this allows them to see the direction of the business and the reasons for it.
Taking the long road: Long-term forecasting does, as its name suggests, carry a risk. Consequently, it requires a certain amount of forward thinking. Understanding what products and services will be in demand and how people will access them in the future is crucial.
A key part of any long-term forecast is the accompanying feasibility study. Management accountants focusing in such areas will look at the resources and capacity a company has, understand its work capacity/goal and calculate the costs of strategy.
In ideal practice, a firm’s long-term forecast will inform, influence and have an effect on the shaping of short-term forecasts. Conversely, these will shape future long-term forecasts.
Companies of all sizes and in all business areas use forecasting to shape their direction, as Ocado demonstrated earlier on in the month. Announcing its first ever profit, the online grocery store and Delivery firm used the figures to announce that it would seek further industry tie-ups and expand its distribution centres.
A large number of forecasts are suggesting that more UK companies are looking to expand too. A recent survey in the south west of England found that 58% of firms were forecasting a significant rise in profits in the next three to five years.