The Benefits of Reforecasts

Many finance professionals spend their lives looking at the past. Statutory accounts, audits and tax returns - all of these "compliance" parts of financial accounting are indeed assessments of the past. For this reason many entrepreneurs see little value in this work, viewing the process as a cost, both in terms of the fees and the tax bill that normally accompanies it.

As far as the entrepreneur is concerned, the real value of the finance function lies in the forecasts and reforecasts of the business. A good forecast is a "rolling" forecast that is always kept up-to-date. The key principle is that it should always use the last set of management accounts as its starting point and should forecast to the end of the current financial year at the very, very least.

The rolling forecast should look at sales performance, sales mix and gross profitability as well as overheads. Similarly a good rolling forecast should incorporate a cash-flow and balance sheet forecast.

The key benefit of a rolling forecast is that it gives the management of the business forward looking visibility. The finance function should not be preparing the forecast in isolation. It is essential that the sales and operational parts of the business take ownership of their parts and use the forecast as an operational reporting tool to predict issues before they arise. This "embedding" of the finance function of a business delivers huge value to the business as it grows.

Many businesses fail to prepare monthly financial reporting and are then surprised when a change in activities has an impact on the financial position of the business. If the impact is good, it might be mis-interpreted as surplus cash and withdrawn from the business inappropriately. If the impact is negative it could have a disastrous effect on the business's bank covenants or even the solvency of the business. If the management team have the time to deal with the issues they can be averted.

At the FD Centre our FDs recommend that the reforecast is carried out monthly and that it is incorporated into the monthly finance report for the board of directors to consider formally in a monthly board meeting. This is good practice for most businesses.

For more information on how the FD Centre can help your business forecasts, contact us today and we can arrange an informal assessment of your reporting.

Entrepreneurial Vision - November 2009 - Contents Page