Do You Really Need a 3-Way Forecast?

A 3-Way Forecast is a vital tool for successful privately owned businesses as it allows the business owner to understand not only their profit, but also what impact that will have on their cash flows and balances.

Many private businesses stop at a simple balance sheet and profit and loss forecast, which is a good start, but by no means tells the whole picture. There are many things that go into a 3-Way Forecast which are vitally important to a business that just aren't captured effectively in a simple 2-Way Forecast:

• Whilst you have payment terms with your debtors, that doesn't always mean they pay on time. If you don't get paid on time, then you may not be able to pay your bills despite your business showing profitability;
• How long does it take to sell your stock, and how much of it may spoil or become obsolete over time despite the fact that you have already paid for it? Understanding your stock ageing profile is important as this is often one of the largest drains on your working capital;
• Do you have enough cash to re-invest in your business by purchasing new assets to help your business run effectively? If you aren't re-investing then your business will almost certainly suffer later on.
• What are the payment terms on your creditors, and will you be able to pay them on time?
• Have you got enough cash set aside to pay your Business Activity Statement when it falls due?
• Company tax can often only be due up to 11 months after the end of the year you earned the profit in. This means that you need to be sure you will have the cash available to pay it when it is due and not always rely on tomorrows profits to pay yesterday's taxes.
• What about your superannuation obligations? Like some other tax obligations, superannuation is a personal liability of the business operator if not paid, and with single touch payroll in place now, the Tax Office knows in real time if you are paying super on time.
• Are you making enough cash to be able to reduce your debts: things likes working capital facilities; hire purchases; fixed and floating debt obligations; and others. What would happen if your bank required you to reduce your facility limits (like many have in the last 12 months)?

If yours hasn't already, most banks are now asking to see a 3-Way Forecast as a matter of course during any finance application or review process.

Even as few as 5 years ago, a 3-Way Forecast may have been a pretty daunting thing to set about doing. Most accounting software now allows you to take historical results and use them to help forecast into the future which can make this process much simpler. And if your software doesn't have this capability, there is usually an add-on that can be used to help.

Even businesses that have historically been good at forecasting have let some of the good habits slip over the difficult last year or so, however it is especially in difficult times that you need accurate and timely information the most in order to be able to make good business decisions quickly, and from an informed point of view.

JobKeeper payments have already been phased back twice now from the original settings, and are due to finish at the end of March, and it seems unlikely there will be any additional stimulus payments made by either Federal or State/Local governments. Rental reductions either have or will be coming off shortly, loan holidays/deferrals will be ending and in both cases there may be some additional payments to make in the months ahead.

So as we enter into what will hopefully be a much more positive calendar year 2021, now is the perfect time to be updating your 3-Way Forecast (or doing one in the first place) to plan what the year ahead will look like for you.