A simple spreadsheet can work well when a business is small and easy to understand. The problem starts when the business becomes more complex than the spreadsheet behind it. A new hire, a larger client, a second location or tighter cash flow can make informal forecasting unreliable at exactly the point when decisions become more expensive to get wrong.
If growth is moving faster than your numbers, it may be time to move from ad hoc spreadsheets to a more structured budgeting and forecasting process.
Growing fast and not sure your numbers are keeping up? Get the numbers working before the next major decision.
Book a Free Client Assessment →The Signs Your Numbers Are No Longer Keeping Up
One of the clearest signs is that you cannot confidently answer a basic question such as: what will our cash position look like in three months?
If answering that question requires a manual scramble through several spreadsheets, bank accounts or reports, the forecasting process may no longer be keeping pace with the business.
Other warning signs include decisions being made largely on gut feel because the numbers take too long to update, different people working from different spreadsheet versions, or profit looking healthy while cash remains tight.
That last issue is particularly important. A business can be profitable on paper but still run short of cash if customers pay slowly, stock requirements increase, wages rise ahead of revenue or major expenses fall due before cash is collected.
A growing business can therefore look healthy while still being financially stretched.
Bookkeeping, Budgeting and Forecasting Do Different Jobs
Bookkeeping records what has already happened.
A budget sets the financial targets or expectations for a period ahead.
A forecast updates that forward-looking view using current information, so the business can see whether actual performance is moving ahead of, behind or away from plan.
They work together, but they are not interchangeable.
Reliable forecasting depends on reliable bookkeeping. If the underlying records are incomplete or inconsistent, the forecast may simply give false confidence.
That is why clean financial records should come first, with forecasting built on top of them.
Not sure your books are clean enough to forecast from yet? Our guide on staying in control of your numbers covers the bookkeeping foundation first.
Staying in Control of Your Numbers →Growth Creates Its Own Financial Pressure
Forecasting is not only for businesses in trouble.
It can be most valuable when the business is growing.
Growth often requires spending money before the additional revenue arrives. A new employee may need to be paid for months before their work produces enough additional revenue. A second location may require fit-out costs, rent, stock and extra staff before it becomes profitable.
The issue is not always whether the business is profitable overall. It is whether it has enough cash to support the next stage of growth.
A forecast helps show where that pressure may arise before the commitment is made.
What Useful Forecasting Actually Looks Like
A useful forecast should give management a forward view of cash flow, expected revenue and major costs, and show how actual performance compares with the original budget.
It should also allow the business to test realistic scenarios. For example:
What happens if a major customer pays 30 days later than expected?
Can the business afford to hire another employee now?
What happens to cash if revenue falls by 10 per cent?
Can the business support a new lease and the associated fit-out?
How much working capital will be needed if sales increase quickly?
The purpose is not to predict the future perfectly. It is to understand how different outcomes affect the business before decisions become difficult to reverse.
Make the Assumptions Visible
A forecast is only as useful as the assumptions behind it.
Revenue growth, payment timing, wages, rent increases, financing costs and other assumptions should be clear enough to test.
If the model only works because revenue is assumed to increase every month without any explanation, it may create more confidence than it deserves.
Useful forecasting allows management to change the assumptions and see what happens.
That is where scenario modelling becomes particularly valuable.
Forecast the Full Commitment, Not Just the Headline Cost
Major business decisions often cost more than the first number quoted.
A new employee involves more than salary. The business may also need to allow for superannuation, leave, workers compensation, payroll tax where applicable, equipment and other employment costs.
A lease may involve rent increases, outgoings, fit-out costs, bank guarantees and make-good obligations.
Borrowing may involve interest, fees, security requirements and repayment obligations.
A forecast should reflect the full commercial commitment rather than only the headline amount.
Where a major decision involves a lease, financing arrangement or employment commitment, the financial model should also be checked against the actual legal terms.
How Often Should a Forecast Be Updated?
There is no single review cycle that suits every business.
A fast-growing or cash-sensitive business may need weekly or monthly updates.
A more stable business may be able to review less frequently.
The important point is that the forecast should change when the business changes.
A forecast prepared once at the start of the year and never revisited can quickly become irrelevant if revenue, costs or business plans move significantly.
Forecasting should be an active management tool, not a document prepared simply because the financial year has started.
When Should You Bring In Outside Help?
Not every business needs complex financial modelling.
But external support may be useful where:
- cash flow has become difficult to predict
- several people rely on the same financial information
- the business is preparing for a major hire, lease, loan or expansion
- margins are becoming harder to understand
- growth is happening faster than internal reporting can keep up
- the owner is spending too much time building numbers and not enough time using them.
The aim is not to make the finance function more complicated. It is to make the numbers easier to use when making decisions.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, our business advisory and accounting team can help businesses move from basic reporting to more structured budgeting, cash flow forecasting and scenario modelling.
We can build forecasting on top of properly maintained financial records so the numbers being used for major decisions are based on reliable information.
Where a forecast supports a lease, hiring decision, financing arrangement or business restructure, our lawyers can also review the legal commitments behind the numbers. That helps ensure the financial model reflects the actual obligations the business is considering.
If growth has outpaced the way you manage your numbers, it may be time to review the forecasting process before the next major commitment is made.
Book a Free Client Assessment →
Frequently Asked Questions
1. How do I know if my business has outgrown a simple spreadsheet?
A business may have outgrown ad hoc forecasting when the numbers are difficult to update, different people are working from different versions, cash flow is hard to predict or major decisions are being made without a reliable forward view. The issue is less about the size of the business and more about whether the current system still supports good decision-making.
2. What is the difference between bookkeeping, budgeting and forecasting?
Bookkeeping records what has already happened. A budget sets expectations or targets for the future. A forecast updates that future view using current information and allows management to see where the business is likely to land based on what is happening now. All three are useful, but they serve different purposes.
3. Is forecasting only useful for businesses in trouble?
No. Forecasting can be particularly valuable for growing businesses because growth often requires cash before the additional revenue arrives. A business may be profitable but still face cash pressure from hiring, stock, new premises or expansion.
4. How often should a growing business review its forecast?
The right frequency depends on how quickly the business is changing. A fast-growing or cash-sensitive business may need weekly or monthly reviews, while a more stable business may review less frequently. The important point is to update the forecast when the assumptions or business conditions materially change.
5. Do I need complicated forecasting software?
Not necessarily. The right system depends on the size and complexity of the business. A well-designed spreadsheet may still be appropriate for some businesses. Others may benefit from integrated forecasting or reporting software as the number of users, entities, locations or scenarios increases. The objective is not complexity. It is reliable information that management can use.
This article contains general information only and does not constitute accounting, financial, legal or tax advice. Forecasting requirements depend on the size, structure, industry and financial position of the business. Professional advice should be obtained for your circumstances.