Key takeaways
- A forecast is a set of assumptions with arithmetic attached, so write the assumptions down first.
- Drive revenue from the operational inputs you control, such as crews, chairs, orders or billable hours, not from a growth percentage.
- Build costs from the real cost structure, with fixed and variable lines separated.
- Update the forecast monthly with actuals and roll it forward so it is always twelve months long.
You do not need a finance department to forecast. You need a clear view of what drives your revenue, an honest list of your costs, a spreadsheet and the discipline to update it every month. Most of the BC owners we work with can build a credible rolling forecast in a few sessions, with their bookkeeper supplying the actuals.
This is the method we teach. It produces a forecast that a bank or an investor would recognise, and more importantly one the owner actually believes.
Write the assumptions down first
Before you touch a number, list what the forecast depends on. How many technicians, chairs, trucks, consultants or sales people you will have each month. The price and the volume per unit. The seasonal pattern. Wage rates, rent, insurance and the major contracts. Any hire, purchase or price change already decided, with its date.
Put these on their own tab. Every number in the forecast should trace back to a line on that tab, and when the forecast is wrong, the question is always which assumption was wrong, not which cell.
Drive revenue from capacity and conversion
Growth percentages are not forecasts. Revenue comes from a capacity doing work at a rate. For a service company that is crews multiplied by billable hours multiplied by rate, adjusted for the season. For a clinic it is providers multiplied by appointments multiplied by average fee. For e-commerce it is traffic multiplied by conversion multiplied by average order. For a consultancy it is fee earners multiplied by utilisation multiplied by rate.
Build the revenue line this way, month by month, and the forecast immediately shows what has to be true for the revenue to appear. If the forecast needs more technicians than you have, the hiring plan is the forecast's first output.
Build costs from the real structure
Ask the bookkeeper for last year's income statement by month. Classify every line as fixed, semi-variable or variable. Fixed lines carry forward with known changes such as a rent increase. Variable lines are expressed as a percentage of revenue or a cost per unit taken from last year's actuals. Semi-variable lines, mostly people, follow the hiring plan with start dates and loaded costs.
Add the lines that do not appear on the income statement but do affect cash: loan principal, equipment purchases, owner draws, sales tax and payroll remittances. This is where the forecast stops being a profit projection and starts being a plan.
Turn it into cash
Profit and cash diverge because of timing. Add a simple set of rules: customers pay on average a certain number of days after invoice, taken from your own receivable history, suppliers are paid on their terms, and remittances fall on the dates your CPA has given you. Apply the rules to the monthly profit forecast and the result is a monthly cash forecast. Pair it with the weekly 13-week forecast for the near term.
Check the cash forecast against the bank balance at the end of each month. If the two drift apart, the timing rules are wrong, and that usually means customers are paying slower than the receivable history suggested. Correct the rule rather than the result. This is also the moment to add anything the income statement forgot: an insurance renewal paid annually, a tax instalment your CPA has flagged, a lease deposit on a new space. Each one is a small line in the forecast and a large surprise if it is left out.
Make it rolling
At the end of each month, replace the forecast month with actuals from the bookkeeper, compare them, note the main variances and update the assumptions tab. Then add a new month at the end so the forecast always covers the next twelve. This takes an hour or two a month once the structure exists. Within a few cycles the forecast is accurate enough to use for hiring, pricing and bank conversations.
Keep the previous version each month so you can see how your assumptions have moved. Lenders and buyers like to see that a company has forecast before and learned from it.
A forecast that has been updated twelve times is a different document from one that was built once.
Where owners go wrong
- Starting with the revenue number they want and working backward
- Forecasting a flat month when the business is seasonal
- Leaving out owner pay, loan principal and remittances
- Building a forecast once for the bank and never updating it
- Keeping the assumptions in their head instead of on the page