Understand your market
With historical information being less reliable than in previous times, it is even more important for business owners to understand their market, according to Richard Wheeler, Principal at Moore Stephens Queensland.
“Gone are the days like in 2004-05 when businesses were flourishing and could expect to generate 15 per cent growth on an annual basis,” says Wheeler. “In times of uncertainty, it’s even more important to understand the market, your products and the influences on your market.
“For instance, if you’re currently selling a luxury product, there may be patches of high income earners associated with the mining industry. But does your product address this market, and outside of this market, how many others are there willing to buy it?”
Develop a unique plan for your business
The first step is to develop a “dynamic” business plan, including a budget, which allows the business owner to make forecasts. Fundamental to this is understanding the market and developing strategies for marketing, product development and other activities.
“Many small and even larger businesses fail in making simple assumptions about revenue growth, without having a nuts and bolts business plan behind those things.
“The business plan should address where you wish to get to and how you’re addressing the market, including reasonable assumptions and methodologies for budgeting. The relationship between income and expenditure is very important. If you’re expecting sales to grow by 30 per cent per annum, there will be an associated increase in costs such as labour.”
However, it is important to review the budget against actual expenditure, to ensure the business is tracking in line with expectations.
“It’s not worth spending time and energy creating a budget and then putting it into the drawer. It’s important to review it regularly before you end up in a position where you have revenues way behind budget and you can’t correct it.”
Factor in current market conditions
While established businesses can use previous data as a starting point, Wheeler says it’s important to factor current conditions into forecasts.
“In my profession of accounting, we know the mining and mining services industry is growing extremely well so we can expect good, strong growth from that area. But on the other hand, tourism and other retail businesses in areas not exposed to mining are doing less well, so expecting growth from that industry or those clients is going to be difficult.
“When we’re working on our budgeting and forecasts, we need to set our targets and budgets around the market and work accordingly, and it’s the same for other businesses.”
Overcoming forecasting obstacles
Yet for businesses in the start-up phase without previous revenue or expenditures as a guide, forecasting is a more difficult challenge. And without a budget, it’s harder to gain funding or attract investors.
There a number of processes you can follow when building financial forecasts without any experience as a business:
Forecast expenses first,including fixed costs such as rent and phone calls to variable costs such as cost of goods sold, labour and marketing. Double estimates for advertising/marketing costs along with legal fees, and track direct sales and customer service time closely.
Forecast revenues using an aggressive and conservative case,.
The former includes more salespeople and products, the latter a low price point and limited marketing channels.
Check the key ratios for a reality check,including gross margin (sale price less cost of goods sold), operating profit margin (ratio of operating profit divided by net sales) and total headcount per client.
Forecasting can be made easier by breaking sales down into parts, for example by product line, month by month. The sales forecast should be backed up by the strategy in closing sales, paying staff, optimising order processing and delivery and pricing.
Ultimately more an art form than a science, accurate revenue forecasting can help business owners plan for the future and achieve their business goals with hopefully fewer worries or red ink.
This article represents the views of the author only and not those of American Express.
Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.