The Authority Guide to Financial Forecasting for SMEs

Pain-free financials for finance and planning

Simon Thompson

• Publisher: The Authority Guides
• Year: 2016
• eBook ISBN: 9781909116641
• Topic: Business
• Subtopic: Finance
• Index: Business

Build a better, faster forecast. In this Authority Guide, forecasting guru Simon Thompson shows you how to build financial forecasts quickly, effectively and cheaply through his unique, proven and easy-to-follow 10-step process. By learning how to create effective forecasts you will master the ability to understand the potential financial outcomes for your business and be able to communicate financial information in order to successfully raise investment or loans.

Part I

Welcome to my world

A forecast is a picture of a financial journey, and you can’t make sense of a journey unless you know where you’re starting from. Clear, recent and materially correct opening balances are a must.

Introduction

Since first devoting myself to a fairly unusual speciality in providing tailored forecasts for small and medium businesses back in 2011, I’ve built hundreds of them. But I’ve also reviewed and worked with even more that I didn’t build myself, and it’s those forecasts that have prompted me to write this book.

To cut a long story short, I’ve seen a huge range in the quality and effectiveness of these financials and, in addition, evidence of a lot of wasted time and effort spent doing it quite badly (and often worse!).

The simple fact is that although financial forecasting is an almost universal requirement for any small business at some point in its life, there seems to be a lack of clear, simple guidance on what’s required, how it works and how to go about it. As a result, far too many businesses routinely get it wrong.

I want to help you to avoid those pitfalls, so I’ll distil what I’ve learnt over many years of building financial projections and share the essence of the rules, benchmarks and best practice I’ve established to create more effective forecasts in less time and with less pain.

Is this book for you?

This book is for just about anyone in a small or medium business who needs to ‘do some numbers’.

It shares underlying principles and golden rules which I have found apply to virtually all businesses regardless of size or aims. From a tiny start-up to a £5–10 million owner-managed business; from a simple cash flow projection for a £1,000 start-up loan to a full financial model for a big crowdfunding pitch; or just to run the numbers on your business plan, whether you’re a sole trader or a limited company, this book is for you.

You’ll find the advice it gives is equally valid whether you’re building your own forecast model from scratch or using off-the-shelf spreadsheet templates or software. Even if you’re outsourcing the whole job to an accountant or consultant (like me!), you’ll be better equipped to procure the work and make sure you get value for money and the result you need.

How will this book help?

This book will:

• teach you the underlying principles of good ‘small business’ forecasting
• help you to make better decisions about how you go about this task
• save you time (and money) in executing it
• make sure you produce a more useful, professional result to give you a better chance of getting your finance.

It will shine a light on:

• why you forecast and what you need to achieve
• the essential benchmarks of all good forecasts
• a foolproof ten-step process that you can apply to nail your numbers in the shortest time.

The overall aim of this book is simple: to help you achieve the most effective financial forecast in the minimum time. And let’s be clear: ‘effective’ means a forecast that will help you get your money!

This book isn’t a ‘manual’. It doesn’t prescribe a specific tool for the job (although I recommend mine!) and it doesn’t deal with the background spreadsheet skills and accountancy knowledge you’ll need if you build your own model. (I assume that if you’re going down that road you’ve already got those core skills.)

What it does provide is essential knowledge, tips and insights into the forecasting process that you can apply, however you go about it.

Doing it properly: profit and loss, cash flow and balance sheet

Whatever you’re trying to do, you can always find a shortcut. Sometimes you get away with it; sometimes you don’t.

This book isn’t about shortcuts. Certainly it is about completing this task in the least possible time with the least possible pain, but its main concern is producing a forecast that is complete and professional and works in any circumstance; a forecast that you can have absolute confidence in, will never need to apologise for and that will always meet the needs of any bank or investor.

Achieving this standard in financial forecasting relies in particular on recognising the importance of the three fundamental elements of business accounting: profit and loss, cash flow and balance sheet, and that you cannot avoid the fact that each depends on the others and can’t be separated. As we shall see, a cash flow that does not depend on a profit and loss, or a forecast which doesn’t have a balance sheet, simply lacks integrity. You may get away with it, but that’s another matter.

It is beyond the scope of this book to explain or justify this approach but it is the premise on which it’s based. You may well encounter apparently simpler styles of forecast which omit one or more of these elements, and they may well be compliant in specific circumstances. But I can tell you with absolute confidence that they will have limitations and the potential to let you down in any number of ways.

Einstein said something along the lines of: ‘keep it as simple as possible, and no simpler’, and that’s the case here. However simple your finances may be, your forecast needs to include all three standard accounting elements to do its job properly.

This book will show you how and why and I promise that in the long run you’ll find it more logical, easier to understand and it will certainly equip you with a more professional stance to take forward in your business career.

If you’re in business for the long haul, sooner or later you’re going to have to get your head around the meaning of profit & loss, cash flow and balance sheet...

Part II

Before you start

Getting to a final, finished version of your forecast can be like getting kittens in a box. You’re bound to cycle through it many times and a clear, comprehensive process is key. (At least start by knowing how many kittens you’ve got…)

Why do we foreca...

Table of contents

• Part I Welcome to my world
• Introduction
• Is this book for you?
• How will this book help?
• Doing it properly: profit and loss, cash flow and balance sheet
• Part II Before you start
• Why do we forecast?
• The eight essential benchmarks of all good forecasts
• Understanding profit and loss, cash flow and balance sheet
• Part III Ten logical, comprehensive steps to a great forecast
• An introduction to the ten steps
• Step 1: The global considerations
• Step 2: The chart of accounts
• Step 3: Opening balances
• Step 4: Capital expenditure
• Step 5: P&L – sales revenue
• Step 6: P&L – direct costs
• Step 7: P&L – overheads
• Step 8: Debt funding – bank and other loans
• Step 9: Investment and dividends
• Step 10: Publishing reports
• About Edge Forecast
• About the author
• Also by Authority Guides