One of the administrative tasks you are supposed to be involved in, as an entrepreneur, is preparing financial forecasts. But many are discouraged because actual business performance ends up varying wildly from the estimates they came up with.
The financial forecasts you arrive at can be closer to the real thing, if you follow some common best-practices that we’ve listed for you.
Its importance is that enables you plan and have contingencies for a range of eventualities. Planning is really good. If it was valued in Kenya, we would have pavements everywhere. Did you know pavements were invented in the 1800s, btw?
Here is a list of things you should practice when making financial forecasts in your business:
1. Learn some finance
In your business, you should be able to give an educated input on everything. Don’t just say you will outsource functions you hate doing. One of the things you have to know is some basics of finance. This doesn’t necessarily mean that you have to go back to school. People go to school for the certification, the knowledge is freely available. You have to show initiative to seek know-how on basics like record keeping, working capital management and financial ratios – which are simple analysis tools.
2. Collect data
Two methods of conducting financial forecasts in your business are quantitative and qualitative. The former, typically, requires that you use historical performance to arrive at future ones. The latter relies on a mix of your intuition and analysis skills. Both require that you base your estimates on facts that happened. The only way you can be consistent and accurate with these is if you remain faithful in gathering all sorts of information about your business.
3. Do proper analysis
This is the make-or-break point of your financial forecasting. Can you decide which of your data is relevant for what? Are you good at comparing this to that? Can you find correlations where many others cannot? Can you prepare your financial forecasts for both internal and external users? To make things simple, know that a small business has only three questions to answer/ask:
- Do you have enough money to operate day-to-day?
- What does your future income look like?
- How much money will you need to raise to cover shortfalls?
You must not forget to include estimated performance of your business under different scenarios. For instance, what happens to my profits if the Government shortsightedly bans plastic bags? haha
4. Make assumptions, it’s okay
I saw someone “advice” young people in Kenya to buy eggs at sh.10 and sell 1000 of them everyday at sh.15 to make like sh.130,000 a month, easy.
I know we discussed the benefits and pitfalls of top-down vs bottom-up thinking but this is overreaching.
All the same, you are allowed to make assumptions since it is the only way to come up with different scenarios, as mentioned in 3. You are allowed not to know everything but they should still be realistic. A golden rule is to overestimate the bad things and underestimate the winnings.
5. Set clear milestones
Do you know about the goal setting theory? People who set clear difficult goals perform better than those who set simple vague ones. Don’t just say you want increased revenue, you have to have the numbers somewhere. It’s time to know, exactly, what success and failure is to you. Bench marking your financial performance in this manner is a way to keep you on your toes and enable you monitor whatever it is you’re implementing.
There are 3 forecasts to make:
- operational – for routine everyday activities
- tactical – for short-term goals
- strategic – for medium and long-term goals
Remember how your financial statements need to be accompanies by notes explaining what you’ve compiled? It is the same in this case. It’s not double work. It’s about reinforcing what is in your mind and explaining to external users like us. I’m not just going to take your word about your assumptions if they are not written down.
7. Use templates
Small businesses in Kenya are usually shot down by prospective investors and financial institutions for not being professional. You can bypass this by employing an accounting/finance employee or using a dedicated software like ERP. But this is expensive, more often than not. You can try and use templates, which are plenty and freely available online. Plus, you may only have to paste them on your excel or google spreadsheet platform.0