Forecast

What it means

A forecast is a continually updated estimate of how the period will end. Unlike a budget, approved once and used as a yardstick, a forecast changes whenever new information arrives.

The most usual form is a rolling twelve-month view: each month one actual closes and one planned month is added. The company always keeps the same depth of view rather than a shrinking remainder of the year.

A forecast is not the projection in a business plan either. A forecast starts from the actuals of past months and contracts already signed; a projection starts from assumptions about the future market. So a forecast is fairly accurate for the next few months and blurs the further out it goes, whereas a projection is equally uncertain across its whole horizon.

How it works in practice

The most practical is a cash flow forecast: bank balance, expected receipts by due date, wages, contributions, VAT and loan instalments. On the sales side it rests on the pipeline and the probability of closing, not on hope.

To be worth anything it is compared back against the actuals. A systematic bias in one direction is information about the company, not about the weather - and it is the assumption that gets corrected, not the result.

We update the client’s monthly forecast right after the month is closed, when the actual figures are known. We also add payments companies often forget: the balance of income tax due, tax advances, an annual insurance premium or an extra lease instalment, so that swings show up in the table before they show up in the bank account.

What to watch out for

A forecast stops working once it becomes a target. A number meant to please management is no longer an estimate, and the company loses the one instrument that could warn it in advance.

A forecast built only on revenue and expenses will not say when the money runs out. An invoice issued in March counts as March revenue but may be paid only in May, so a profitable company can have an empty account in April. Alongside the profit figure, working capital and actual payment dates have to be watched too.