It is important to forecast the income and expenditure of any business as accurately and realistically as possible. Once done, comparisons can be made with the forecast against the actual results achieved and timely remedial action taken with any wide variations. This applies to all income and expenditure. If your income should fall below forecast levels you can immediately discover the reason and take remedial action to resolve the situation. Likewise if your expenditure is greater than forecast you can identify the cause and address the issue.

Forecasting may appear to be difficult at first sight, but with careful thought and realistic assumptions it is surprising how accurate a forecast can be. Not only will a good forecast show up any slippage in your assumptions, it will very quickly allow you to see how efficient your business is operating and reveal areas that can be improved and so increase profit.

One important point to remember is if you find you have made significant errors in your forecast and you discover the error, you can always revise it for the remaining time it has to run.

The income of the business should be comparatively easy to set. It will comprise any revenue coming into the business from various sources. Obviously different businesses have different streams of income, which will include sales of goods or services, commissions, fees, rents, rebates and many other sources of revenue. When compiling a forecast do not fail to take into consideration any known price increases or other factors, including inflation that will affect your income figures. It is a great sense of achievement and encouragement when you see your actual income figures exceed your forecast income figures and your expenditure figures in line with or below your forecast. So try and get it as near right as possible the first time.

When setting the expenditure figures for the business extra care should be taken. This is one of the most difficult forecasts to make. Done realistically and with careful thought it will be of enormous benefit to the business.

What you are endeavouring to do is to forecast as accurately as possible how much money it will cost you to operate your business for the period of the forecast (usually one year), split into monthly segments. This will mean itemising and considering all expenditure, large and small that the business will incur. It is not possible to be absolutely accurate with these forecasts, but with care, realistic figures can be arrived at. Don't forget to include known increased costs that will be effective at a later date such as taxes, statutory costs, rent increases, wage increases, inflation, seasonal variations and any other known factors. It is always advisable to add a small percentage to the expenditure figures that are likely to fluctuate as a contingency.

Once your expenditure figures have been set and you are satisfied with them make sure that you check your actual costs against your forecast on a regular basis, certainly at least once a month.

By doing this you will be able to see immediately what your expenditure is in each area of forecast and enable you to take remedial action on any serious over expenditure.

It will also show up quickly any shortfall in your income and enable you to determine the reason for the shortfall and take swift action to rectify the situation. It will show up any areas where savings can be made on items of expenditure, for example savings can very often be made by shopping around for outside suppliers of services.

In this article we have shown the forecasting of expenditure will go a long way in enabling you to control your overheads.

Forecasting may seem to be difficult to carry out but with care and realistic assessments it is very useful, interesting to do and extremely satisfying when comparisons with actual results are made.

Michael Russell Your Independent guide to Small Business