The importance of Business Forecasting

13 November 2017

The importance of a well thought out forecasting regime is an essential but sometimes underappreciated tool for businesses. All businesses produce budgets or forecasts at some level but it is important to be clear on the difference between the monitoring functionality offered by a quarterly cash flow forecast or costs budget and the business planning capabilities of a good forecasting model.

Often, forecasts are approached with scepticism because they are necessarily a best guess of what the future will bring for a business and this can result in them being approached as an admin task of little value. Whilst the ‘best guess’ nature of forecasting is unavoidable a properly thought out integrated forecast model which offers flexibility and is capable of linking the business’ forecast profit and loss with a forecast cashflow and balance sheet can provide an important and valuable tool that allows a business to plan for the future.

A good forecast does this not by predicting the future but by providing the ability to run ‘what if’ scenarios. This allows the business to assess how it might deal with a variety of situations.

For most businesses their ‘best guess’ forecast turning out to be wrong as a result of an unexpected downturn will cause difficulties but for housebuilders these difficulties can be acute because of the high value of the products that they are trying to sell. With average house prices currently over £220,000 a delay in the sale of just five units causes a £1,100,000 hole in the housebuilder’s cash flow and if the fall in demand continues it does not take long for significant measures to be required to ensure the business can continue to operate. 

Housebuilding is a complex industry with many possible approaches to dealing with cashflow pressures. A forecast model can help to estimate the effect of spreading the build out of a site over 15 months instead of 12 or assess how delaying the construction of roads within the site will impact cashflow. A good forecast model will allow the business to simulate the effects of a downturn and arrive at a plan to deal with the situation before it happens.

For times when a business is looking to expand a good forecast model can help to identify whether a venture is worth pursuing or assess which of a variety of possibilities is best suited to the business. Forecast models can help to show how a growing business can be funded by showing the impact on working capital and therefore cash of any expansion. If debt or further equity funding is required the forecast model can provide investors or funders with reassurance that their funds will be as safe as the business can make them.

In either good times or bad approaching the future with a robust forecast is vital for all kinds of businesses. At MHA MacIntyre Hudson we have experts in place with the knowledge and expertise in building detailed, tailored forecast models specifically for the construction and real estate industry. We work closely with management to ensure that the forecast produced reflects their vision for their business and provides the necessary information to become a key piece in their decision making process.

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