What’s a Three Way Forecast and Why Do I need One?
Put simply a three-way forecast is a forecast of the three key financial statements in your business – the Profit and Loss, Balance Sheet and the Cash Flow Statement.
Some of our business clients operate without any budgets, some will budget their Profit and Loss but very few will produce a three-way forecast. Many clients think they don’t have the time, others will find it too difficult to build an Excel model to produce it, whilst others think it will be cost prohibitive for their accountant to produce a three-way forecast. Given the improvements in technology in recent years, however, we are now able to produce detailed forecasts quickly and relatively inexpensively using state of the art forecasting software.
Here’s how we do it for a client with a 30 June year end
In June we’d work with the client to produce a budget. We’d upload the current year’s results to date and estimate the June numbers to create a full year forecast. We use this as a base for producing the next year budget – all we need to do is estimate a growth factor for each line on the Profit and Loss, split it by month and the budget is complete. We upload the current Balance Sheet and the software creates a budgeted Balance Sheet and Cash Flow Statement. It’s that simple.
Producing the budget is the base for the forecasting that happens during the new financial year. Depending on the client needs we can update the forecast monthly or quarterly and produce a full suite of reports that determine your progress in achieving your budgeted activity and more importantly what your likely full year results will be, what your balance sheet will look like and how much cash you’ll have in the bank.
What’s in it for you as a business owner
The best way to explain this is with a case study. We’ve been working with a client over the past two years that has grown their sales and profitability by 100%.
At the quarterly strategic meetings, we hold with the business owners the three way forecast is an integral part of the agenda and is a key tool for them in managing their business through the year.
What If Analysis
At various stages through the year, new business opportunities presented themselves and we were able to model the impact on the entire business in minutes.
Streamlined Access to Funding
When the client needed to obtain bank finance earlier this year, they provided a copy of the three-way forecast and their personal financial situation to the bank. The forecasts proved to the bank the cash flow of the business would enable the clients to service the loan comfortably and the finance approval was breeze even in the current environment where banks are tightening their credit policies significantly.
We look forward to discussing how a three-way forecast can help your business with you soon.