As a business owner, you understand the significance of effective business planning, budgeting, and forecasting. Especially as the end of the financial year approaches.
We highly recommend using a three-way forecast to elevate these financial processes and better understand future financial health.
Partner and Business Specialist Marcus Hill explains the three-way forecast and how it can benefit your long-term goals.
Building a Three-Way Forecast: A Comprehensive Approach to Business Planning
The three-way forecast encompasses three financial reports: the projected profit and loss statement (P&L), balance sheet, and cash flow statement.
By integrating these components, businesses comprehensively view their future cash position and financial health.
A three-way forecast provides a more accurate and holistic outlook on a company’s financials. Unlike a basic P&L or balance sheet on their own, it includes cash flow forecasts.
Enhanced Accuracy and Analysis
One of the key advantages of utilising a three-way forecast is the ability to forecast changes in the balance sheet while analysing historical and projected data to identify shifts in the profit and loss and cash flow.
By incorporating these elements, businesses can achieve greater accuracy and insight into business performance.
This comprehensive approach allows for better-informed decision-making.
Importance for Financing and Investor Relations
A three-way forecast holds immense importance for businesses seeking financing from banks or attracting investors. It displays due diligence.
When applying for funding, having a well-prepared three-way forecast can effectively communicate the following:
- the exact funding requirements,
- the timing,
- the rationale behind the request,
- and the repayment strategy to the credit department of a bank.
The forecast provides an opportunity to demonstrate the additional profits the investment would generate. Henceforth the promptness with which the initial loan could be repaid.
Presenting a comprehensive forecast mitigates risk for lenders and increases the likelihood of securing favourable financing terms.
Tax Planning and Optimisation
The three-way forecast is an invaluable tool for tax planning and optimisation, for it includes:
- revenue,
- direct costs,
- overheads,
- and associated tax payments.
By analysing projections, businesses can determine whether they need to adjust tax instalments to avoid overpaying throughout the year. Conversely, if the instalments are too low, setting up a savings account to prepare for the tax bill becomes feasible.
A current concern for business owners is the continuously rising interest rates. The forecast allows businesses to account for increased repayments and evaluate available cash from operations, enabling them to better manage the impact of interest rate fluctuations.
Adaptability and Decision-Making
The ability to respond to changes in the economic landscape is vital for building a resilient business.
While high-growth businesses may require quarterly forecast reviews, others may find an annual forecast sufficient. Regardless of the frequency, the crucial aspect lies in leveraging the three-way forecast to make informed decisions that consider both profit and cash flow perspectives.
Take your business planning to the next level.
The three-way forecast is a powerful tool that empowers businesses to make informed and confident decisions, combat economic challenges, and secure financing from lenders.
By integrating the projected profit and loss statement, balance sheet, and cash flow statement, businesses understand their financial future comprehensively.
Furthermore, the three-way forecast enables tax optimisation, facilitates financing applications, and supports decision-making in an ever-evolving business environment.
Contact our specialist advisory and accounting team today for assistance in creating a three-way forecast tailored to your business. Email us at admin@elementsag.com.au or phone: 07 3878 9181
Good luck on your business journey!
