Scenario analysis and forecasting

By May 26, 2016September 10th, 2018Business Planning & Strategy, Performance, Technology

SCENARIO ANALYSIS & FORECASTING

Whilst there are some elements of knowing the future that would be best left unknown, I’m sure many of us would like to be able to accurately predict what the future of our business holds. What if I told you that you can do this? Scenario analysis and forecasting are tools that will enable you to predict the future with a reasonable level of accuracy. Whilst these two activities are largely the same thing – planning and predicting your business’s financial future, we’ll look at them separately here.

DOWNLOAD our free forecasting & cashflow spreadsheet.

Forecasting

(aka budgeting) is a tool for planning the financial future of your business, providing a roadmap for success. Typically you would expect all businesses to sit down at least once a year and budget out the next 12 months – planning for expected sales, wages, overheads, etc. A simple method is to start with the previous 12 months and adjust based on your expectations of the upcoming year.

Mapping out the year to come allows you to see where there might be cash-flow difficulties so you can act before it becomes a drama (e.g. getting an overdraft facility in place nice and early). Once you’ve got the plans you can then track your business performance during they year to see how you’re tracking against the forecast – if it’s not going to plan, investigate what is going wrong early before it signals dire straits.

Scenario analysis

It is really useful if you’re looking at making changes to your business (and with all the planning you’ve surely been doing, who isn’t planning on making changes?!). It takes a base level forecast (see above) and then makes adjustments based on your future plans which could include things like:

  • Opening a new office/branch/store
  • New product lines
  • Taking on new staff
  • Buying an office
  • Price adjustments
  • Leasing new equipment

Once you’ve created a few different scenarios you can overlay the adjustments onto your base level forecast so you can start to see what might happen if you go down a particular path. This lets you play around with what might be without putting your business at any financial risk.

There are some great software options for automating some of the above and we prefer using CrunchBoards for all our forecasting and scenario analysis. If that doesn’t suit you could always use a trusty spreadsheet – there’s one over in the resources section of this site that you could use to get started.

Bottom line? Get stuck in! Planning for your business is to plan for success, don’t leave it up to chance.

We love working with our clients to help them plan for the future success of their business. If you’d like to plan for the success of your business please get in touch today, we’d love to help.