Predicting how your company will fare financially may be one of the most difficult things a business has to do, but it's also one of the most important. Just small mistakes can lead to massive errors in your calculations, which could potentially put your finances in jeopardy, as well as your tax contributions.
Watch out for these common forecasting errors:
1. Payment delays
Companies of all sizes can forget to account for the amount of time clients can take to pay, especially if they are on a month-by-month contract. This cannot just affect your cash flow, but can also have a big impact on the accuracy of your long-term projections.
The best way to get around this is to look at payment cycles over a series of months to get an estimate of when each client is likely to pay you. It's a good idea to come up with two scenarios; a best and worst-case. This allows you to see how much money you'd have if all your clients pay on time, and what state you'd be in if they are delayed. Doing this can help you get a more accurate view of your revenue and the state of your finances.
2. Historical results
Many companies use historical data to help them determine future forecasts and expenses. For example, if you spent X amount on equipment in 2017, you could estimate that the figure would be the same for 2018. However, this doesn't take into account changes that may increase it, such as suppliers putting up their costs. Other areas, such as marketing or recruitment, can fluctuate in cost depending on your need.
You need to factor in an additional amount of money to serve as a "buffer" should some of your costs or expenses increase, or you have an unexpected bill. This will help you create a more solid foundation for a sustainable business plan in the long term.
3. One-off forecasts
Because finances are probably one of the most difficult areas for businesses, many companies choose to make it an irregular task. However, this is counterintuitive and means your estimates will be inaccurate. As well as this, it will take you much longer to balance your books than if you had regular forecasts.
Aim to do quarterly forecasts but have weekly sessions where you look over your finances and adjust the estimates as necessary. This will help keep your books as accurate as possible and means you have a solid understanding of your company's financial position.
4. Being overly optimistic
Whether you're calculating that every project will finish on schedule, none of your expenses will increase, or that all your clients will pay on time, being overly optimistic can mess up your financial forecast.
Use your regular updates to keep your forecasts as accurate as possible, even if it makes grim reading.