Your management reports need to be an accurate insight into the performance and health of your business but they also need to be forward looking.
Just the thought of that can be exhausting, but there are some things you can do to make yourself feel more comfortable with forecasting.
Everything hangs off your sales pipeline
There is a lovely fellow I know that has a holiday home cleaning business. His clients book his cleaners via an online portal. Most holiday houses are booked well in advance for busy times and add hoc during the quiet times. He knows from his booking system, not just how busy he will be but, what days he will be busy. During the quiet months he can use his experience to estimate demand.
As hard as it might seem, you need to find a way of blending any forward orders (signed projects etc) with informed guess work based on experience.
Put it in a spreadsheet and forecast at least 12 months out and then add your people costs and overheads under it. It’s ok to use big groups, don’t try to add each small expense. Your income is going to vary far more than your phone bill.
It’s not just dollars that need to be forecast, staff number, systems, offices, etc. This is easier from some businesses than others.
You should be able to check it for reasonableness based on previous results and gut feel. Avoid basing sales only on external factors, such as “the total market is X%, if we only get 1% of it……”. usually a recipe for disaster. Stick to what you can grow from, no matter how early in your history. Start with 1.
Use your forecast to help run “what if” scenarios.
It is better to be approximately right than exactly wrong
Most people think accountants add things up to the cent, they do but once that’s done they often make substantial changes to those numbers with broad assumptions. They “accrue”, “provide”, “prepay” and “amortise” and that can run into hundreds of thousands of dollars.
Like meditating, it’s as much the act of trying that improves your skills as a forecaster. Don’t let it intimidate you.
Focus on the large and variable, not the small and fixed
We see a lot of large and complex reports that can make it hard for a business to keep a handle on what’s going on. Try to make it simple.
Start by tidying things up by seeing if you can arrange expenses into the three broad groups of service delivery, client acquisition, and administration expenses.
Then see if you can declutter by joining groups of small expenses together. We can only hold so many things in our heads at any one time. If it’s an expense you need to keep an eye on, have a process outside of your normal P&L review as well. Schedule a regular detailed review in your to do list.
Xero has a great function where you can easily create profit and loss layouts, move things around and join lines together as a summary. Give it a try.
As for the big and important things, they can be hard to manage, let alone try to predict. Obviously, income can vary tremendously depending on the nature of your business. Good pipeline reports are critical here.
Of the three groups of expenses I mention above, delivery costs will usually cause you the most headaches. All the more reason to strip away the detail in the other two cost types.
Most service firms have trouble balancing demand with staff levels. You need processes that support strong deal flow as well as robust project management and reporting. It’s usually best to be slightly resource constrained and turn down some work. Having one person on the bench has the same effect on profit as two or more people working on projects.
Make as many of your costs variable as you can
Old school strategy says you need large fixed costs and small variable costs to make money, well maybe if you’re a monopoly. The economics of start ups say that prices will always move toward variable costs. The one thing you will know is a lovely warm and safe feeling if your sales fall and your expenses fall along with them. Anyone on a variable office lease last year knows that all too well.
We price payroll services by timesheet so our clients businesses can ebb and flow, we know that at any volume we are cheaper than their equivalent fixed cost of having payroll employees do it for them in-house. We can do that because we are specialists and more efficient. The variable pricing is not a risk to us because it is amalgamated, like having a balanced share portfolio. A lot of our costs are variable too.
The old thinking that doing it yourself is always cheaper doesn’t take efficiency based on better technology into account. If you want to dig out shrubs from your garden it might take you days, a person you can hire might do it in a couple of hours because he has a machine. You owning that machine would make no sense. Unless it was a hobby, we have all seen stranger and more expensive hobbies.
Think of your budget as pegs in the ground and forecasts like your satnav
Calendar years are a great way to look at your business. Your can start in January after a break, fresh and rearing to go, and then celebrate all you might have achieved at year end. If you have a calendar year budget, spilt up month by month, you can track your progress towards it. But, I would suggest, a better way is to reset the estimates each month based on actuals. Accountants call this a “rolling forecast”.
Just like the estimated arrival time on the satnav in your car it might vary quite a bit in the early stages, and especially these days, you might change destination along the way. You need to be able to recalculate. At the end of the year, over a drink, you might think about your budget and how different the actual result was, and that is a budgets only real purpose.
Don’t use your overall budget for line by line cost control. Set spending limits by type, use departmental profit and losses, use ratios rather than absolutes.
Forecasts get less accurate into the future – that’s ok
Anyone who criticises your forecast after the event is a bum. Just like anyone that fat-shames someone at a gym is a bum. We all have to start somewhere. It is a journey, not a magic 8 ball.
Build in a feedback loop
Our capacity for abstract thought is both our blessing and our curse. Use your power for good. Regularly review your assumptions and rules of thumb by comparing your forecasts to actuals.