There’s never a perfect time to make decisions about your business growth.
You spot a gap in the market, a hire who could add extra capacity or bigger premises down the road, and the pressure is on to move fast. Many business owners make those calls using old accounts and a gut feel for how their business is doing and whether it can absorb the cost.
That approach usually works… until it doesn’t.
A proper financial forecast can give you a forward view of your business’s income, costs and cash, built from your own numbers, so you can test a decision before you commit to it. This blog explains what financial forecasting involves, where it can save you from making costly mistakes and how we build it into the support we give to growing businesses like yours.
What is financial forecasting?
A financial forecast projects your income, costs and cash position forward, usually month by month across the next 12 to 24 months. It’s built from your trading data, sales trends, payment terms, seasonal patterns, fixed overheads and any planned investments.
It’s different from a budget, which sets a target for what you want to happen. Instead, a financial forecast predicts what’s likely to happen in your business given the assumptions you feed into it, and it gets updated as the results come in and your circumstances change.
Done properly, a financial forecast covers three things:
- A profit and loss projection showing whether your business is trading profitably
- A cash flow projection showing whether you’ll have the money in the bank when you need it
- A balance sheet view showing your overall financial position.
For many SME owners, the cash flow element matters most day-to-day. Profit on paper doesn’t pay wages or suppliers. Cash in your account does.
The assumptions behind a forecast matter as much as the numbers themselves.
Your sales growth needs to be based on a pipeline you can point to. Your payment terms need to reflect how your customers pay in practice, which is often slower than the terms printed on your invoice. If you get those underlying assumptions right, your financial forecast will be a useful planning tool. Get them wrong, and it might tell you a story that your numbers don’t back up.
Why you need a financial forecast
Growth puts pressure on cash before it delivers profit, and that’s the trap many business owners fall into. For example, your business might double its order book over the next few months. While your revenue would look fantastic, if your suppliers need paying in 30 days, while your customers take 60 or 90 days to settle their invoices, your business could run out of cash, a problem accountants call overtrading. It’s one of the most common reasons profitable, growing businesses fail, and it often catches owners off guard because every other signal in the business points to success.
The same pattern can show up in other decisions. Hiring ahead of confirmed demand or sales adds a fixed monthly cost to your business before the revenue to cover it exists. The new salary, plus on-costs (National Insurance and pension contributions), is a commitment you’ll carry regardless of whether the extra business materialises. Taking on new premises or more stock can also lock in spending months before your sales catch up.
And applying for finance without a clear financial forecast means going to a lender with a rough estimate. Lenders can tell the difference between a considered projection and a number picked to sound plausible.
In each case, the underlying issue is the same. You make the decision based on gut feel and a snapshot of your bank balance, without a clear view of how your numbers might play out over the months ahead. By the time it hits your cash flow, the options for fixing it are more limited than they would have been if you’d had the right financial information at the start.
How financial forecasting can support your growth plans
A financial forecast lets you test your decisions on paper before you commit to them. It allows you to run the numbers first, then decide whether to go ahead, delay or scale your plans back. It can help with the following:
Hiring
A financial forecast can model the full cost of a new role, including salary, National Insurance, pension contributions and onboarding time, against the revenue you expect it to generate or support. You’ll see how many months your business needs to fund the role before it starts paying for itself and whether your current cash position can carry it. If the answer is tight, you can plan around it by delaying the start date, phasing the role in part-time first or lining up a short-term loan to bridge the gap.
Expansion
A new location, product line or service adds cost from day one and can take time to build its own income. Financial forecasting lets you model the break-even point for that investment, such as how many extra sales it needs, how long that’s likely to take and what could happen to your cash flow in the meantime. It also lets you compare options against each other. Investing in a second site and launching a new product line might cost similar amounts upfront but carry very different break-even points. A financial forecast lets you see that before committing.
Funding
Banks and investors expect a credible financial forecast, backed by numbers they can interrogate. A well-built forecast, grounded in realistic assumptions about your business and your trading history, gives the lender all the information they need to make an informed decision. It can also strengthen your negotiating position.
Cash flow
Even a healthy, growing business hits pinch points, often around tax payments, seasonal dips or a big invoice landing before your customers start paying. A financial forecast can flag these points months in advance, giving you time to arrange finance, adjust your payment terms, or plan around a quieter month. Spotting a potential gap in month four when you’re looking at month one will give you far more room to manoeuvre than spotting it when your balance is already low.
How can Sysum Howard Duggan Accountants help?
Growth is easier to get right when you can see it coming. While a financial forecast won’t remove every risk from expanding your business, it can put the decision in your hands, with robust evidence behind it.
Financial forecasting is part of the forward-looking advice we build into the support we give to our clients. We can create accurate forecasts from your trading data and insight into your business and sector, so the assumptions reflect how your industry behaves.
Our specialists work with a wide range of business clients, from established trades and hospitality businesses through to larger SMEs and corporates. That experience shapes the assumptions we build into your forecast.
And because we work closely with your business as it grows, we’ll review and update your forecast as results come in, so your numbers stay up-to-date and useful. When trading moves faster or slower than expected, we’ll adjust the forecast alongside you, so you’re not left to spot the drift on your own, months later. And if your business needs more regular financial oversight, our management accounting and fractional FD support can give you ongoing access to that forward view.
Whatever stage your business is at, you’ll get the same level of expert care and a team that stays close as your plans develop.
So, if you’re weighing up a new hire, a new location, an investment or a funding application, talk to us before you commit. We’ll help you build a financial forecast that shows what the decision might mean for your cash flow and profitability, so you can move forward with a clear picture of what’s ahead. Get in touch with SHD&Co to talk through your growth plans and what a financial forecast could look like for your business.