Why financial planning is not a waste of time.
People say to me that they cannot predict the financial outcome of their business and therefore spending time doing a budget forecast is a waste of precious time. The forecast never works they say.
This is an outdated view. Given the right tools and consistency of approach, you can use your rolling budget forecast to give your business a benchmark against which you measure performance. It is all a matter of using the right tool (maybe my BIC Model?) and adopting a month by month review process.
The first budget forecast that you do will be quite rough. You need to forecast using the best knowledge that you have no matter how unsure you feel. The process of preparing your first full financial plan is more important than the result. You learn a lot about your business. Things that you were not clear about. I find that customers need to refer to their accounting system to refresh their knowledge of when large expenses come due or even what the cost actually is. It may have changed.
Once the forecast is completed, the BIC Model calculates your future cash flow. If the result does not make sense, then you need to look again at your assumptions and question where the money is going to or coming from. With a bit of adjustment and careful thought, you should have a model that makes sense. You can see ahead up to about 18 months. It depends how much actual data has been imported to the model. This first budget forecast now becomes your benchmark.
Next month you import the current results. How did you go against your first benchmark? At this stage you learn more about how your business is tracking. Areas needing attention show up clearly against your first benchmark. You have the opportunity to correct things that are not tracking as you want. Usually you will need to revise the forecast and possible make a note of operational things that need to change in the way the business is run. In this example, the new forecast looks ahead 17 months. (When you get down to forecasting just 6-9 months ahead, you can move the time scale along to give you more months to forecast and less months of actual data.)
The magic of the system is that you start to gain much better control of your business by measuring results agains forecast every month. You are able to set target performance in areas that most count. The interesting observation that I have made over years and years of helping businesses with their management control, is that if they practice measuring results and re-forecasting each month, they become quite adept at predicting outcomes especially in the short term – 2-4 months out. This is where the business starts to operate “in control” and owners can concentrate on working the business knowing that there is a pathway to successful outcomes.