The financial forecast in a business plan is a critical part of it. It really does not matter that reality seldom turns out as forecast. This is because the forecast;
- provides the setting for your assumptions as well as risks and uncertainties
- explains the direction you are going in even if the detail proves different from what you expected
- enables the reader to understand the drivers of the business better
Some important points on the forecast
- clearly set out your main assumptions
- explain the risks and uncertainties but focus on explaining what you would do if some key assumption proved to be wrong
- It is really helpful to show what level of shortfall in sales or some other key assumption will take you to break-even. How sensitive is your forecast to a 10% difference in some key assumption?
- avoid dog-leg forecasts without showing a very convincing explanation: that means trading has been going along at a low level and, suddenly, you forecast it is going to accelerate dramatically. Maybe that will happen, but persuade me.
- make the numbers clear. So don't tell the reader that sales will be £103,497 next year. That level of accuracy is nuts. Whatever number you hit it will not be that one. Also the reader will not remember if there is too much detail. Give the result in thousands and show £103, they will remember that.
- show the forecast on the same page and in the same table as any previous trading - don't try to hide sudden increases in sales or profitability.
- don't forecast 10 years ahead - nobody believes 10 year forecasts. They struggle to think you can get next year's forecast right so three years ahead is as far as you should go. However - if it is important to show a broad direction then maybe you can justify outlining a 5 or even a 10 year scenario in rough numbers but such cases are rare.
- make sure it all adds up - double and triple check everything. You look scornful...of course I'll do that...but business plans often have typing errors and addition errors and it looks very bad.
- you don't need to show all the nitty gritty detail - your summary forecast should fit just the key numbers on less than one page. Put detail in an appendix.
- explain the forecast - briefly - but explain it.
