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Planning for the Future: 5 Tips for Building a Robust Financial Forecast

financial forecast

Although the immediate implications of Brexit and Covid-19 are behind us, the long-term repercussions are still being felt by small businesses, thanks to supply chain delays, stock shortages, and an increasingly competitive talent landscape.

So how do we as business leaders plan for the future during periods of such turbulence? For some, the idea itself may seem counterproductive. After all, how can we look ahead with any certainty?

But while it might not be easy, efficient business forecasting should be a priority. If small businesses are to remain competitive and capitalise on future opportunities, it is vital we prepare for the unexpected.

Here are five pieces of advice for leaders looking to create a foolproof business forecast.

Understand your cash flow

Assessing your yearly cash flow – in other words: the money coming in, and the money going out – is usually the best place to start when it comes to developing a forecast.

Begin by looking at the money flowing into the business during the next 12 months, remembering to factor in your payment terms, and the period of time that typically elapses between delivering work and getting paid.

Then, you need to compile your expenses to get a sense of what you’ll be paying out. This will probably include things such as employee payroll and office rent, along with any other overhead costs associated with running your business – such as stationery, software subscriptions, and phone bills.

Once you’ve gathered these data points, you should be left with a thorough understanding of your business’ cash flow for the year ahead. Some may choose to extend the forecast period, although that will vary depending on the nature of your business. A five-year plan may be overwhelming for a small startup, for instance, while a slightly more established business may find it helpful to look that far into the future.

Anticipate change

During the process of reviewing your cash flow, you’ll probably come across some changes that you see coming down the line. These might be recurring trends that you’ve experienced previously, such as seasonal peaks and troughs in customer demand, or they might be one-off changes as a result of strategic decisions you’ve made or plan to make.

Will you be launching a new service, for example, or taking on a significant number of new customers that will require you to hire new staff or bring on freelance support?

Whatever they are, weigh up these changes and consider how they will impact your cash flow. At this point you may well be dealing with ‘known unknowns;’ although it may not be possible to predict the costs you’ll incur with complete accuracy, at least you know you won’t be taken by surprise when they arrive.

Know your tax

Although it can be daunting, ensuring that you know how much tax you will have to pay is another vital part of business forecasting. And one of the reasons it’s so important to have a clear understanding of your expected cash flow is because that will help you estimate how much tax you will need to pay.

Make sure you familiarise yourself with your business’ tax liabilities so that you can plan proactively. This should include things like corporation tax, which you are required to pay if your business is a limited company, and National Insurance, which you will be required to pay a portion of on behalf of anyone you employ. There are a number of other taxes you may be liable to pay, such as dividend tax, Capital Gains Tax (CGT), and business rates; if you are unclear, consider seeking advice from an independent tax specialist. 

Identify the finance options available to you

Unforeseen costs are a reality for every small business – even those with the most robust financial forecast in place. Cash flow pressures can change on a day-to-day basis, whether that’s as a result of new regulations, increased rates, or delayed payment.

As a result, it’s worth taking the time to identify viable financing solutions for your business, should you need to access funds. There are a number of loan options out there, but do your research as many of these can have minimum revenue requirements for smaller businesses. At Muse, we recognised the need for small and medium-sized businesses to access agile and efficient funding, which is why we built our invoice financing solution to provide just that.

Use technology to unlock transparency and efficiency

Underpinning each of these pieces of advice is financial visibility. It’s impossible to have control over your business’ cash flow if you don’t have insight into where your money’s coming from, and where it’s going.

For this reason, my last tip is to make sure you’re using the digital tools at your disposal to give you the transparency you need. Perhaps that means using invoicing and accounting software that integrates with your business banking. Or perhaps it’s cash flow insight you need, providing you access to clear, up-to-date financial data to inform your projections.

As well as offering access to finance, Muse has also built a product that provides business owners with the tools and data they need to feel in control of their money. Because in uncertain times it’s more important than ever that business owners have the ability to plan for the future.

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