Forecasting is a fundamental business management tool that every manager should master. This financial projection enables you to anticipate future performance and guide strategic decisions. In today’s environment, where financial planning is becoming crucial, understanding forecasting is essential to ensure the long-term viability of your business. Our professional accounting services regularly support companies in this essential process.

What is a forecast?

A forecast is a financial document that presents estimates of a company’s future revenues, expenses and results over a given period. It’s a projection based on realistic assumptions about business trends. For example, a restaurant will draw up a forecast estimating the number of covers served per month, the average ticket, raw material costs and fixed charges over the coming years.

This document generally comprises three main components: the projected income statement, the projected balance sheet and the financing plan. Each component offers a different perspective on the company’s future financial health. The standard time horizon generally ranges from 1 to 5 years, depending on the business sector, with quarterly or half-yearly updates recommended to maintain its relevance.

Unlike the annual budget, which details income and expenditure month by month for the following year, the forecast takes a more strategic, multi-year view. For example, an e-commerce company will draw up a budget to optimize its advertising campaigns over 12 months, while its 3-year forecast will incorporate international expansion and technological investments. This long-term approach makes it possible to integrate complex elements of corporate taxation and strategic planning.

The different types of forecasts

There are several categories of forecasts, depending on their purpose and time horizon. The budget forecast focuses on the following year, detailing projected income and expenditure month by month. This type of forecast requires a recommended monthly update, and is particularly well suited to service companies or retail outlets that need to adjust their forecasts regularly to take account of seasonal variations.

Cash flow forecasts analyze future cash flows to avoid payment difficulties. For example, a construction company that invoices its customers at the end of a project, but must pay its suppliers monthly, will use this type of forecast to anticipate its short-term financing needs. This approach is particularly useful for seasonal businesses such as ski resorts or ice cream parlors, as well as for those with complex payment cycles in industry or construction.

Business plan forecasts are used to support business start-up or development projects. It presents financial projections over three to five years, the horizon favored by investors to assess a project’s profitability. This document is a key element in convincing business angels, investment funds or obtaining bank financing. Technology startups and fast-growing companies frequently use this type of forecast, with quarterly or half-yearly updates to meet investors’ needs.

Last but not least, the tax forecast takes into account tax aspects and helps optimize the tax burden. Particularly useful for companies subject to complex tax regimes, or those with international operations, this forecast helps plan tax returns and anticipate tax deadlines. This aspect often requires the involvement of specialists in bookkeeping and taxation.

Why prepare a forecast for your business?

Drawing up a forecast offers many advantages for business management. Firstly, it enables you to anticipate financial difficulties and take corrective action before they arise.

This approach also facilitates decision-making by providing a clear vision of the financial consequences of each strategic choice. Managers can thus assess the profitability of investments or measure the impact of an expansion.

Forecasting is an essential communication tool with financial partners. Banks and investors systematically require these documents to assess the viability of a project or grant financing.

For startups in particular, having a solid forecast facilitates access tostartup coaching and public or private support schemes.

How do you draw up an effective forecast?

Forecasting requires a rigorous methodology and reliable data. Start by analyzing your company’s historical data to identify trends and cycles. Use suitable tools such as Excel, with its projection functions, or specialized software such as Business Plan Writer or Previsionnel.com, which automate certain calculations and offer ready-to-use models.

Then study your market and competitive environment to adjust your assumptions. External factors such as regulatory developments or industry trends have a significant influence on projections. Identify the critical variables to be analyzed: monthly sales, raw material costs, personnel costs, customer payment times, seasonality, and lead-to-customer conversion rates.

Take tax considerations into account right from the planning stage. In particular, consider the deduction of depreciation and provisions to optimize your tax burden. Validate your assumptions by comparing them with industry data and seeking advice from experts or peers in your field.

Build several scenarios by applying precise variance figures: an optimistic scenario with +20% on revenues and -10% on expenses, a pessimistic scenario with -20% on revenues and +15% on expenses, and a realistic scenario based on your historical data. Test a minimum of 5 to 10 variables, depending on the complexity of your business, to identify critical levers and prepare action plans adapted to each situation.

Don’t hesitate to call on a Parisian accounting firm to validate your assumptions and optimize the structure of your forecast. These professionals bring their technical expertise and sector-specific knowledge to bear in fine-tuning your projections.

Mistakes to avoid when drawing up a forecast

Several pitfalls can compromise the quality and usefulness of a forecast. Excessive optimism is the most common error, leading to overestimated revenues and underestimated expenses. To avoid this pitfall, apply a 10-15% safety margin to your forecast expenses, and adopt a conservative approach by reducing your revenue estimates by 5-10%. Use historical data as a benchmark, and compare your assumptions with those of external professionals.

Don’t overlook hidden or exceptional costs that can have a significant impact on your bottom line. Think in particular of legal fees, compliance costs or expenses linked to a possible tax audit. Create a budget line dedicated to “contingencies” representing 3 to 5% of your forecast sales to absorb these unexpected costs.

The absence of regular follow-up is another major error. A forecast needs to be updated every 3 to 6 months, depending on the volatility of your business sector, to remain relevant and useful for decision-making. Set up warning indicators, such as a deviation of more than 15% between forecasts and actuals over two consecutive months, which should trigger an immediate revision of your projections.

You should also avoid neglecting the tax aspect of your projections. Poor anticipation of tax obligations can lead to significant discrepancies between forecasts and reality. Systematically validate your tax assumptions with a chartered accountant, and incorporate regulatory changes into your projections.

Finally, if you plan to outsource certain functions, factor the cost of the accounting firm into your projections. Tax inspection insurance may also be a good way to secure your projections. To validate the consistency of your forecasts, use industry benchmark ratios and submit your document to an external review before finalization.

An indispensable tool for managing your business

Forecasting has become an essential tool in modern business management. Over and above its financial projection function, it is a genuine strategic management tool that guides decisions and secures the development of your business.

It requires time and specific skills, but the benefits in terms of visibility and risk control more than justify the investment. Don’t hesitate to surround yourself with qualified professionals to maximize the efficiency of this essential process.