Forecasting plays an essential role in running a business; from setting the direction in which a company will move to giving a snapshot of the state of play in a firm. Reviewed and updated regularly, a business’ accounts should be a dynamic part of its corporate strategy.
The long and short of it
There are essentially two types of forecast; short-term and long-term. Both forecasts are just as important and augment one other accordingly. Looking at a defined period of time, from six to 12 months, preparing a short-term forecast should consider a number of factors.
It should always look at sales strategy, understanding the company’s current position and identifying where future revenue streams might lie. A firm’s operational strategy regarding its upcoming costs should also be factored in, as should the profit/loss and balance sheets.
Other elements to include are a firm’s cash flow and any funding in place or being sought. Depending on its market position and overall strategy, such regular forecasts can shape how a company moves forward.
Forecasting in the long term gives a picture of where a company sees its strategy and sales figures taking it in the next three to five years. For businesses working in partnership or with shareholders, this lets them see the direction and the reasons for it.
Taking the long road
Long-term forecasting does, as its name suggests, carry a risk. As a result, it demands a certain amount of future thought. Understanding what products and services will be in demand and how people access them in the future will be crucial.
A key part of any long-term forecast is the accompanying feasibility study. Management accountants focusing in such areas will look at the resources and capacity a company has, understand its work capacity/target and calculate the costs of strategy.
In perfect practice, a firm’s long-term forecasts will inform, influence and affect the shaping of short-term forecasts. Conversely, these will shape future long-term forecasts.
Companies of all sizes, and in all business segments, use forecasting to shape their direction, as Ocado showed earlier in the month. Announcing its first ever profit, the online grocery store and delivery firm used the figures to announce that it would seek further industry tie-ups and expand its distribution centres.
A large number of forecasts are suggesting that more UK companies are looking to expand too. A recent survey in the south west of England found that 58% firms were forecasting a significant rise in profits in the next three to five years.