Why a financial forecast is essential for your business
A part-time CFO may be what your company needs to navigate today’s complex business environment. Business leaders and CEOs are busy. With little precious time, it may seem impossible to add one more thing to your plate. Financial forecasts may be common knowledge, but few CEOs really have the time to build a financial forecast for their business. From a lack of time to a shortage of resources, there are many reasons why you may not have a financial forecast yet.
However, this simple tool can do wonders for the future of your business and provide the competitive advantage you need to be successful. Read on to learn why a financial forecast is important and how to create one without wasting your time.
What is a financial forecast?
Financial forecasts are most often used to predict the financial results of a company. The expenses and income of a company are estimated over a certain period of time, usually one year. Historical data, including accounting and sales, as well as external market data or key economic indicators can be used to develop a financial forecast.
Businesses use financial forecasts to set expectations for the future and determine what is really possible for a business. Financial forecasts can also be specific to a certain area of the business. For example, a company can develop a financial forecast for sales.
Why should you create a financial forecast?
As a CEO or entrepreneur, your time is valuable. Much of his focus and effort is devoted to seeking new business opportunities, investing in marketing and sales, and seeking new avenues for growth. All of these activities are worth your time, but they leave little room for many other things.
Financial forecasts take a back seat too often. While business leaders recognize their importance and even intend to create forecasts, they are overlooked due to more pressing matters. A financial forecast may not help you instantly move the needle in the same way as other executive moves, but it will set your business up for long-term success. Financial forecasts provide more than just a perspective for the future. They offer a roadmap for your business to follow, setting goals and measuring success along the way.
Get a clear direction for the future
You likely have sales goals, revenue goals, and growth strategies planned for the foreseeable future. Reporting for each month, quarter and year is common among companies. In fact, it is so common that it often becomes routine. Have you stopped to think lately about why you project the numbers you do or what is the overall goal for your business?
Without a clear direction for the future, you are left with arbitrary goal setting. Creating a financial model forces you to put concrete plans and expectations on paper. A one-year financial forecast based on your current track record and the trajectory of your business is a great place to start. Pay attention to where your business will end if things continue as they are. Is that where you want your business to be in one year? Are you making progress towards your overall goals?
A financial model provides a visual representation of the future of your business, so you can decide if things need to change. Approaching your business goals with intention, rather than falling into old patterns, can breathe new life into your business. Also, taking action with a purpose can make you more likely to reach your goals than aimlessly hesitating.
Adjust early and often
In business, companies that can pivot can survive. Companies that cannot make the necessary adjustments will quickly fall behind the competition. Fortunately, a well thought out forecast can help position you to make adjustments quickly and frequently. Even the most thoughtful plans run into roadblocks from time to time, so preparing for change is essential.
When you create a strong forecast, you set a goal or goal. Over time, you may find yourself moving toward that goal too slow or faster than expected. You may also find that the initial goal you set no longer makes business sense. Whatever the case, having a financial forecast allows you to align your expectations with reality.
The sooner you can identify mistakes or realize that things are off track, the faster you can make the necessary adjustments to get back on track. Instead of reviewing your company’s performance at the end of the year, when it’s too late to make changes, use a financial forecast to provide accountability along the way.
Focus on the right KPIs
You probably have countless reports and data files stored on your computer. As a business leader, analyzing your company’s performance is a key part of your job. However, there are likely some numbers or metrics that you value above the rest. By creating a financial forecast, you can highlight the KPIs that make the most sense for your business and eliminate the rest of the clutter.
By focusing your attention on the KPIs that move the needle of your business, you can more accurately determine your progress. You can also recognize deficiencies sooner because they are no longer buried under piles of unnecessary data. Flagging your KPIs provides an additional level of focus for your business, helping you gain an edge over the competition.
Plan for multiple scenarios
Ideas, big and small, are what keep companies running. However, tackling a new idea can be a big risk. Investing time and money in a project that does not produce results can drain your resources, as can successful companies that are not planned properly. Forecasting can help you work through what-if scenarios, determining what the outcome would look like if an initiative is successful or not.
Using the numbers in your forecast, you can also more accurately predict what the outcome of a scenario would mean for your business. How will it affect the rest of your organization? Financial forecasting allows you to test your theories and analyze ideas without taking significant risk or wasting resources.
Work smarter when you know your numbers
Financial forecasting may sound great, but what can you do if you don’t have the time or resources to create your own? Business leaders can work smarter by outsourcing their financial forecasting. You don’t have to invest in hiring a full-time employee and leave your hours open to focus on running your business.
A part-time CFO can develop your financial forecasts by providing an unbiased look at your data. You can work with a CFO only when necessary, paying a fraction of the cost of an in-house executive. Experienced consultants, like those at K38 Consulting, bring industry-specific expertise to help you realize your growth potential and generate financial forecasts.