Financial Forecasts and Financial Projection

A long term overview of your company's finances is necessary to plan effectively.


Get assistance with your Financial Forecasts and Projections with OCFO.

One of the biggest mistakes business owners make is managing their business’s finances solely from their bank account. Managing your business’s financial data in this way does not account for VAT that is due next month or the provisional tax on the horizon in three months’ time. It also doesn’t consider the fact that you might need to replace a large asset half a year down the line. These can all have a significant impact on the profitability of your business and future growth.

Managing your business through your personal bank account restricts you from making informed decisions about the financial future of your company.

Remember that for any SME, cash is king. If you are in the dark about what your operating expenses are or where your cash balances will be in six months’ time, the decisions you make today could put your business at risk resulting in cash flow issues and even closure.

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Budget and cash flow forecast

The most effective way to understand your business’s future cash flow is to prepare a budget and a cash flow forecast.


A budget is a spending plan for your business based on historical data such as your income and expenses and is a prediction of your expected profitability for the year ahead. It can be broken down into individual months – especially if sales or costs are inconsistent or ad hoc in nature.


A cash flow forecast is normally a monthly representation of your expected cash flow balance for the next 12 months. This financial forecast uses the cash inputs from your budget and is adjusted for other cash flow items which could include: loan payments, asset purchases, tax payments, expected funding to be received, etc.

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More about budgets and setting a budget

Detailed budgets are the sharpest tool in your financial arsenal.


Setting a budget also allows you to benchmark your cash flow and helps with financial planning. How do you know whether your business has done well if you cannot compare your actual performance to the goals you’ve set for the year? It is also helpful to create different budgets and forecasts for different expected scenarios, for example, a good vs bad sales year.

A well-constructed budget can break down the exact detail of each sale along with cost drivers for your business. For example:

Each line item on your income statement can be predicted based on projections and prior income. The aim is not to be 100% correct, but to build guidelines that help you more effectively manage your business’s finances.

Improving cash flow with a cash flow forecast

A cash flow forecast gives you a handle on any underlying issues affecting profitability.


Preparing a cash flow forecast will enable you to predict your expected cash balance at the end of every month. When you see your expected cash balance is below your minimum requirement for a particular month, you are able to take action to mitigate risk and make the necessary changes to avoid going into the negative.

Here are some ways in which you can avoid a negative financial outlook:

If none of the above are possibilities, there is always the option to negotiate an overdraft facility with your bank. You are more likely to get a better rate on your overdraft when your bank balance is healthy than when your cash balance is already in trouble. Foresight is key and this is only possible through accurate basic financial information and a cash flow forecast.
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Implementing strategic changes

Once you have prepared your cash flow forecast, you are able to make informed decisions about the future of your business.


Although budgets are prepared on an annual basis, they can be reassessed on a quarterly or half-yearly basis, depending on the size of your business. Cash flow forecasts should, at minimum, be prepared every six months (preferably every quarter) – especially when dealing with large ad hoc cash flow items like loans or asset purchases.


Make sure you have the right tools in place to accurately understand where your business is, and what direction it is going. If there is still a level of uncertainty, seek expert advice.


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Frequently Asked Questions

If you do not have a budget in place yet, the best time to prepare one is now. If you have prepared budget before, at a minimum, a budget should be prepared annually. The best time to prepare a budget is before the start of a new financial year. This allows you to start your new year with targets to measure yourself against. Some companies only prepare budgets in the first few months, or they prepare it in month one and it is only approved in month three. This can result in financial performance in months one and two not being properly comparable and having to catch up to targets in month three.

For a small business where you are the owner and operator, you take ultimate responsibility for the budget. Getting financial expertise to assist you with this can improve the process significantly, but you know your business better than anyone, so you take ultimate responsibility.

For a medium-sized business, if someone is responsible for driving a specific line item in the budget, they should be part of the process of developing that budget. E.g.

  • If you have a marketing manager who needs to achieve a certain marketing target, they should be part of the budgeting process in order to determine the cost of achieving that target.
  • If you have a sales manager who needs to achieve a certain sales target, they should be part of the budgeting process in order to determine the cost of achieving that target.

Although it is tempting to use prior year expenses and merely adjust for inflation, your business could be in a very different position this year compared to last year.

  • You may have doubled your sales since last year, therefore your service staff might need to double to provide those services.
  • New staff require computers, desks, laptops, access to software, etc. All these need to be taken into account.
  • You may have moved into larger premises. Your new rent budget needs to cater for your new space and not your old lease.
  • You may have offered large discounts in the prior year to keep clients during tough economic times. These discounts may fall away in the new year.

As your business grows, you may be able to negotiate bulk discounts with your suppliers, increasing your profits. Increased profits will result in larger tax bills. You need to be aware of this.

During the year, you can prepare adjusted forecasts to take into account the change in your business. Some companies call them Quarter 1 Forecasts or Half-Year Forecasts. These are not normally done in as much detail as an annual budget. Your initial annual budget can remain as a guide to use for your budget process in the next year. Your new forecasts can be used to compare to actual results for the rest of the year.

Each business is different and will have different indicators. Use some indicators that are specific to your business and industry. In general, so of the key business indicators to measure against are:

  • Sales growth
  • Gross profit margins
  • Net profit margins
  • Operating Expenses as % of sales


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