Building a sales forecast for the company. Risk and profit assessment
However, making a forecast is often a difficult process for the project manager, who is torn between wanting to show details that are both generalized and ambitious.
What approach should be taken to create this management tool that measures the relevance of envisioned decisions and makes it easier for the manager to make decisions?
WHY MAKE A FORECAST?
Forecasting is a management and forecasting tool that helps improve the profitability of a project.
Рroject being created or already in operation. It allows you to:
- Evaluate project prospects and measure business risks,
- imagine, model and measure the consequences of decisions that can be envisaged,
- make choices based on a preliminary budget, and then monitor and measure the difference between the real numbers on the ground and projections thanks to the management chart.
In addition to the visibility and costing that a financial forecast provides, it is also a real learning tool for the creator and a business management aid, especially because of the modeling it provides.
HOW TO MAKE A FORECAST?
Making a forecast is not done in a few hours because this tool is not a simple amalgamation of several metrics. Making a financial forecast requires a careful approach that must be done in several sequential steps.
Strategic analysis before making a financial forecast
The first step is to identify the short-term (1-2 year) development opportunities (or creation project) that can be envisioned for the business and the challenges that may be associated with them. This step requires a clear picture of the medium-term (5 years) business project, its sector of activity and the means of achieving the goal.
For this stage, the manager or founder must answer a certain number of questions in order to determine the main strategic guidelines:
- What course does the company choose for the next 5 years?
- What will the company be doing in 1 year?
- What are the goals for the coming year?
- What are the areas for development?
Funding plan for the forecast
The first phase of the forecast highlighted strategic decisions and areas for improvement in the project. The second step is to create a financial plan for the forecast. This includes:
- Listing, estimating, and planning the costs associated with the actions envisioned (investments, hiring, research, consulting, purchases, leases, etc.). Here we are not talking about recurrent costs, but about all the costs associated with the implementation of a particular strategy),
- Identification of the financial resources available to the company and the financing that needs to be raised to cover the needs.
Once all of these elements have been identified, they will be grouped together in the financial part of the financial forecast.
In most cases, it is interesting to make a distinction between medium and long term needs and financing. This avoids financing short-term company needs, such as working capital needs, with long-term financing (loans over one year, equity, etc.). This is not recommended in most cases.
Estimating Forecast Costs.
After estimating turnover, the next step is to determine the amount of expenses that will be required for the business.
To do this, the manager or founder should analyze each expense item, distinguishing between fixed and variable costs and paying special attention to sensitive items such as personnel costs. Expenses should be estimated and dated to determine their impact on cash flow.
To facilitate the adjustment work, it is advisable to have a precise wording explaining the calculation method used. For example, if you open a business in Europe:
- "rent: 1,200 € / month (+ 2% / year)",
- "3% of the turnover of goods XXX,
- " Salary of 1 person fixed 2 000 euro / month + annual bonus 300 in December (+2% / year)
A summary table, classified with subtotals, can also be a valuable aid. Often it is helpful to call on a professional (an accountant) to make a forecast. On the one hand, it allows you to present a "certified" forecast to potential investors, and on the other hand, it provides a technical advantage:
- Making sure that all elements have been accounted for ( expenses, taxes, etc.). The accuracy and relevance of the forecast largely depends on the completeness and accuracy of its constituent elements.
- Using appropriate software limits inconsistencies and facilitates modeling.
- Be able to compare the resulting forecasts with the company's industry average.
- Better perceive the results and consequences of some complex decisions (legal status, company and/or executive taxation, social protection for the executive and his family, salary costs, etc.).
In order for the forecast to be effective, it is important that the turnover and expense projections be objective, as a number of conclusions will be drawn from the results of the forecast, such as:
- The amount of share capital,
- Rationale for the business model,
- Expected rate of development,
- Cost of goods and/or services,
- The level of the break-even point,
MANAGEMENT TOOLS DERIVED FROM THE FORECAST
Balance sheet forecast
The balance sheet forecast is not the main analytical document most studied by entrepreneurs. It does, however, provide an idea of the company's financial balance sheet and the state of its assets at the end of each period.
The projected balance sheet is a document that is highly valued by financial partners because it also provides a better understanding of the company's financing cycles and financial performance.
Projected Income Statement.
The projected income statement allows you to examine the profitability of the business for a specific period (usually one fiscal year). Before you start your project, you need to confirm your project with a projected income statement.
It can take the form of a classic table showing revenues on one side and expenses on the other, or as a table of interim management balances. This second solution makes it easier to analyze the numbers.
It makes no sense to produce a projected income statement without critically analyzing it, because such an analysis often allows you to improve the project by questioning certain data.
An analysis of the projected income statement and the projected balance sheet allows for a better understanding of the company's financial performance and an examination of certain metrics.
Cash Flow Forecast
A cash flow forecast is a way to present the dynamics of cash flow over the next several months (and years). It is presented in the form of a table with monthly bank receipts and disbursements. This comprehensive monthly classification of cash inflows and outflows allows you to track the evolution of cash flows.
If the situation calls for it, alerts can be set up and monitoring can be more accurate, moving to weekly or even daily monitoring if necessary. This allows you to anticipate funding problems as well as manage cash surpluses.
Having cash flow allows a manager to act quickly and freely if necessary, without having to ask his or her financiers for approval. In this sense, a cash flow forecast is an important tool that allows the company director to make sure he or she has the means to act.
Forecast and information spreadsheet
The effectiveness of the forecast becomes even greater if it is supplemented with a preliminary budget and a monthly spreadsheet to monitor the budget. If a dashboard is needed to manage the company, it is indispensable when the situation is stressful (company formation, significant business development, financial difficulties, etc.). It allows you to measure the performance of the company and respond very quickly.
The task of the information table is to monitor it regularly, as well as its ability to group very general information, because, although we are talking about it in a financial context, it can combine additional aspects (qualitative indicators, monitoring of human resources, logistics, etc.).
The forecast is an important tool for preparing a development or business creation project. It is both an element that brings together all financial information and a tool to confirm and refine the economic model.
Making a forecast requires time, deliberation, information gathering, analysis, and some accounting preparation. If the stakes are high, it's often worth resorting to a supportive approach to make it a real decision-making tool.