Steps of Business Forecast include:
- Problem definition
- Cash flow forecast
- Profit forecast
- Balance sheet forecast
- Profit determination
Problem Definition
It is important to note those earlier identified 'threats' to your business to ensure that, as you forecast, you can see the deviation of the best and worst models. For example, if a business has previously identified the threat of a diminishing cheap labor force, then its forecast needs to reflect that the price of labor (or any other resource, such as power) is going to go up.
Cash Flow Forecast
This seeks to forecast a bank balance after a period – typically 12 months. This forecast shows the sources and application of funds.
Profit Forecast
This modifies the cash flow in an attempt to calculate taxable income and, in the process, forecast a businesses income tax liability. There are two differences between a cash flow and a profit forecast. The cash flow forecast includes all expenditure in the period, whereas the profit forecast looks to match revenue with the costs associated with generating that revenue. To achieve this, one uses non-cash expenses to estimate some of the costs associated with running a business.
Balance Sheet Forecast
While we have based this example on a smaller business and, while forecasting balance sheets demonstrates completeness and a high level of technical integrity in forecasting, we feel the process is complex and better left to a professional. We also feel that the additional benefit is outweighed by the costs for a small business.
It is always easier to forecast the future performance of a business if your business is already up and running as there are past trading results to look at. When a completely new venture is being planned, a certain amount of imagination is required. However, this is in no way a license to be overly optimistic.
Profit Determination
The essential difference between cash flow and profit is that cash flow includes all items of income and expense, whereas profit seeks to match income and costs related to the generation of the income in a period of time; usually 12 months.
To facilitate the calculation of profit (and hence, the income tax due) the cash flow statements were split into four sections. We now take the total of income and the operational costs into a Profit Statement. We add depreciation to the operational costs and subtract our adjusted operational costs from income. This difference will indicate a profit (where the difference is positive) or a loss (where the difference is negative).
Where there is profit, we need to then calculate income tax. This calculation depends on the legal structure adopted for the business. Where a business is registered for Goods and Services Tax, we take only the net payments and receipts into account.
It should be noted there is always a risk in new product development. Despite the time and effort put into planning the new product may not earn a significant return on investment.
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