The benefits of long-term forecasting cover many bases, both administrative and strategic. It helps businesses grow sustainably, prevent liquidity issues, and secure finance/investment when they need it most.

A robust forecast changes growth plans from a leap of faith into a calculated step. In other words, rather than financial planning being an administrative burden, your forecast is a tool that provides a data-backed green light to take bold actions and make big decisions towards growth.

To start with, it's important to understand the difference between a budget and a forecast, which we cover separately in our blog!

Understand the true cost of hiring

If you hire a new employee on a £40,000 salary, the true cost isn’t just the monthly gross pay.

• A forecast forces you to account for employer National Insurance, pension contributions, and recruitment fees.
• More importantly, it reveals the "Cash Buffer" required.
• Most new hires take 3 to 6 months to become fully productive; your forecast shows exactly how much "runway" you need in the bank to support that person before they begin generating their own weight in revenue.

Track and monitor Investment ROI

If you’re looking at a new piece of equipment or a major infrastructure overhaul, your forecast enables you to see how the investment will pay for itself.

By modelling the investment, you can determine the Break-Even Point.

“To justify this £10,000 machine, I need to produce 200 extra units per month at a 30% margin.”

If your sales forecast doesn’t show a realistic path to those 200 units, the model has saved you from a costly mistake.

Time big decisions with greater precision

The when is often as important as the what. Good decisions made at the wrong time are bad decisions. Your forecast helps avoid these errors.

Suppose you want to expand in December, and have the profit to do so, but your forecast reveals a significant VAT bill and January dip. February might be a might safer time to make the investment.

Scenario planning (What if?)

Scenario Planning is where forecasting and financial modelling really deliver value. Instead of trying to predict the future perfectly, you can prepare for multiple outcomes!

During the COVID pandemic, the Office of National Statistics (ONS) said that "42% of surveyed businesses had less than six months’ cash reserves and 3% said they had none."

Best, Expected, and Worst-Case Scenarios

Sustainable businesses don’t just have a Plan A; they will have three as a minimum, including the best, worst and expected outcomes from a period. Business owners should adjust their assumptions, test different scenarios and understand how the business will react to different conditions.

• Best case scenario: What happens if that big contract signs early or a marketing campaign is massively successful? Can you deliver? Do you need extra staff?
• Worst case scenario: What if your biggest client leaves or a supplier raises prices by 20%? This isn't about being pessimistic but knowing exactly where your breaking point is.
• Expected case scenario: This is your ‘business as usual’ plan based on current trends.

Stress testing your cash flow

Scenario planning with a forecast and financial model means you can stress test your bank account before any crises hit. You can simulate shocks to see how the numbers are impacted. If you normally get paid in 30 days, it will show you what happens to your cash flow if everyone starts paying in 60 days instead.

Key levers to test

Most businesses have a couple of major levers that have the biggest impact on their bottom line. Modelling lets you experiment with these numbers in isolation to see how sensitive they are to change.

For example:

• Sales volume: "If I sell 10% less than expected, can I still cover my fixed rent?"
• Pricing: "If I increase my prices by 5%, how much can my customer base drop before I actually lose money?"
• Costs: "If the price of my raw materials goes up by 15%, do I need to raise my prices immediately to stay profitable?"

Margin safety Zones

The following table is based on a current price of £100, sales of 100 units, and variable costs of £60 per unit.

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The domino effect

If one number in your scenario changes, you can immediately see how this ripples through your sales, profit and bank balance.

Running these “what if?” scenarios regularly (ideally once a month) remove the fear of the unknown, so you can keep up with the economy instead of reacting to it.

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Your forecast and financial model promotes confidence in stakeholders and allows business owners to focus on commercial/operational aspects. If you’d like help building a forecast or financial model, or just need pointing in the right direction, we can help.

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