WHAT IS A THREE-WAY FORECAST, AND WHAT ARE THE BENEFITS?
A three-way forecast is a forecast linking the three fundamental financial statements of a business, the Profit and Loss, the Balance Sheet, and the Cash Flow Statement. In the past, an excel spreadsheet with an abundance of formulas to link the three financial statements made the exercise often hard and inaccurate. However, it is now possible to produce accurate, trustworthy, and affordable three way forecast using state of the art forecasting software.
STRATEGIC BENEFITS – Modelling the initial strategic vision.
Like any investment, there is always risk in running a business. Cash management is one of the primary reasons businesses have difficulty staying afloat. A Profit and Loss forecast will determine the profitability. However, the cash forecast calculated from the Profit and Loss and Balance Sheet will determine the period where extra funds are required. It considers all cash inflow and outflow of a business such as loan repayments, working capital, GST, Income tax, CAPEX and the like.
Furthermore, there are always a few possible strategies. They need to be compared to establish the risks, upside and downside associated with each strategy to decide which one to pursue.
TACTICAL BENEFITS – Reviewing and adapting the initial strategic vision monthly, quarterly, and yearly.
A three-way forecast should be integral to the monthly, quarterly, and yearly executive management meeting agenda. It is a time to analyse the variance between the forecast and the actuals to pinpoint specific areas or departments requiring further investigation to understand the reasons for over or underperformance, adapts the strategy early, prevents any risks not determined at the initial stage, and, most importantly, roll the forecast to keep planning further in time.
WHAT-IF ANALYSIS – Extra strategical and tactical modelling benefits.
Three-way forecast allows during tactical meetings to model the impact of any new business opportunities and new strategies due to the constant change of the environment within minutes.
FUNDING BENEFITS – Serviceability calculation and strategy understanding by Banks and Investors.
When start-ups or businesses with low tangible assets need to find investors to raise capital, a valuation must be undertaken. The most appropriate valuation technique for these businesses is the discounted cash flow (DCF) technique which requires future cash flow to be forecasted. Furthermore, investors use ratios to evaluate an investment requiring forecasted free cash flow. Finally, increasingly, banks require three-way forecast as part of their lending due diligence to evaluate the cash capabilities of the business to service the loan, understand the strategy of the business, and the need for extra funding above its cash surplus.
Feel free to contact us anytime or to request your free initial consultation to discuss further how a three-way forecast can help your business.
