One of the major driving forces of being a successful entrepreneur is to be able to make your venture profitable. The key to this is to prepare financial forecasts so that you know the path and route that you are heading. These forecasts need to be realistic. So how do we do that?
Should the forecasts be used as a budget for staff, a target for middle management or be the stretch for the entrepreneur to demonstrate major achievements. These are dilemmas for management.
The sales forecast should; • Be exactly what senior management consider that the organisation can achieve. • Show (given the current financing of the business) the level of sales that the business can achieve in the current marketplace and economic conditions and pricing structure. • Demonstrate a clear vision of the entire strategy of the organisation in terms of the current manpower and past experience
The sales forecast should not; • Be a target to achieve, clearly set at an unrealistic level. • Contain ‘hope sales’ such as one off contracts that are less than 50% likely. • Have in place random extra staff to be hired to satisfy growth strategies that are unsustainable.
The extra staff may not come on board in time and may not be available. Beware of forecasts such as these. The sales forecast is the key to the rest of the forecast and time taken on that deliverable enables the rest of the forecast to fall in to place. Other consideration must be given to the resources required to achieve this forecast, primarily being, staff, technology and premises.
One major factor often overlooked when constructing financial forecasts is the ability for businesses to manage, develop and grow the ‘gross profit’ line of the business. Sales costing more or at a reduced gross profit weaken the organisation. That is a key factor and is the source of the phrase; ‘sales are vanity profit is sanity.’
Please be aware of a forecast that sows growing sales and profits and yet generating large amounts of cash. It rarely happens. Businesses eat cash. The business has to reinvest in plant or assets to generate the business.
Cash can be a limiting resource, so once the profit and loss has been established as a forecast a cash flow is urgently required to understand the funding. Can this funding be obtained?
Next week I shall be talking about how to achieve your financial forecasts.