2/3 of your forecast is generally missing

When we create our forecast, we all focus heavily on revenue, expenditure and expected profit. However, this is only 1/3 of the picture. Leaving it there is like trying to complete a jigsaw puzzle with only 1/3 of the pieces.

So what are the other missing parts? A balance sheet is a key componenent of the reporting suite of most companies, and this is largely historical. Very few companies include a forecast balance sheet, and yet, this is the very thing that will determine their future valuation

And a cash flow forecast is critical. As we all know, cash is the fuel that keeps an organisation operational, and knowing when it will run out, especially in a scale-up, is not optional.

Cash flow forecasting is one of the most complex aspects to model for many companies. As soon as you move away from a monthly subscription model into annual or some other subscription frequency, the cash flow no longer ties to the income forecast. A single line in a revenue forecast might need multiple lines in a cash flow forecast. What might look like a steadily increasing revenue forecast, can become big swings in the corresponding cash flow forecast.

The way round this is often to create cash flow forecasts which sit alongside the revenue forecast. However, they are notoriously difficult to align, without the right tools.

When I ran a software business, we had some pretty tricky times, from a cash flow perspective. With developers on the payroll that needed to be paid each month, it was crucial to forecast cashflow from the various projects to ensure we were able to meet payroll, particularly when trading was challenging. Understanding the cash inflows from various projects, and their timing relative to the monthly outgoings, helped inform payment terms being negotiated with new clients, to maintain a healthy cash blance. This detailed visibility on the timing of future payments mean we were able to spot possible cash flow shortages and find creative ways to fill them, such as discounts for up-front payment

I like to think of forecasting as like planning a route on your GPS. If you’re driving from Lands End to John O’Groats, your GPS will help you stay on track and tell you when you’re likely to arrive. When things don’t go quite to plan, it will update the forecast with your new ETA. But a forecast isn’t sufficient. You need an operational plan, one that will tell you when and where you’ll need to refuel along the way - that’s the purpose of your cashflow flroecast.

Are you struggling with an incomplete operational plan?   My purposeful planning programme  helps  you to generate an operational plan that will increase valuation whilst keeping investors feeling safe, supportive and on your side.