Q. Is forecasting essential to a business plan?
A.While forecasting can be tricky, it is the core of your business plan. Many small businesses complain about being asked to predict the future. But as Bobby Lane of Denver Chase tells his clients: “Think about how that looks to the bank or investor, they need to know they are going to get their money back.” Almost all investors and banks require three-year forecasts on a detailed month-by-month basis. Some expect five years. Investors want to be able to judge in financial terms how likely you are to be successful.
Q. What should I include in my forecast?
A.Before you begin you must have a clear picture of your company’s present position. Otherwise it is very difficult to make accurate projections of your future costs. The business plan must include your profit and loss account, receipts and payments, a cash flow statement and balance sheets among other things. Lane stresses that without cash and balance sheet your forecasts will not accepted by investors.
Q. Should I be conservative or optimistic?
A.Deloitte accepts that forecasts will not be “gospel truth” but it stresses that being realistic is essential. Lane adds: “If you are clearly exaggerating you will find that investors put your business plan straight in the bin. But remember your business plan is a sales document. Dull plans will also go in the bin.”
One of the best ways to strike the balance is to offer both a conservative and an optimistic forecast, factoring in various “what if” scenarios. Investors are very keen to see how much strain your business needs to come under to buckle.
Q. How should I treat inflation and tax?
A.Every investor will know you are unable to predict future inflation and taxes. Deloitte says that both making a sensible guess and ignoring their effects are reasonable responses. But ensure you indicate which route you have taken. It is noteworthy that at times of very low interest rates or taxes presenting a model with increases factored in becomes more important.
You can enhance the credibility of your forecasts by hamming up your team’s profile. Lane says: “Your team’s experience is extremely important. Sure, investors are buying into the vision and the market, but most importantly they are buying into the people.”