Financial Forecasting, an essential building block to running a profitable and scalable business
First off, a brief definition: in essence, financial forecasting is the process and act of predicting how a business is going to perform in the future. There are obviously many factors that must go into this calculation, and it is one which is going to be particularly difficult to get right at times, which is all the more reason to start practising it today. A good financial forecast will, as we will see, lay the foundation for a stronger and more resolute business, and one in which the realm of tomorrow is not quite so much a dangerous or worrying prospect, but more like a welcome dream. Let’s take a look now at the whole act of financial forecasting in some detail, and see whether you might make us of it in your business.
For any business to succeed and to have a brighter future, you need to make sure that you are thinking about that future as fully as possible. There are many ways to do this, and many different pathways you can take to fully appreciating what may come and what is unlikely to change. But one method – or, more accurately, set of methods – which is likely to be particularly useful for any business, large or small, is financial forecasting. If you are not yet making use of financial forecasting in your business, or you don’t fully understand what it is and what it might do for you, then read on. In this article, we are going to discuss this topic in some detail.
Why Have A Financial Forecast?
Before we look into the process of actually creating and updating a financial forecast, you might first want to know why you should actually bother with one at all. Most business owners would agree that it is an essential thing to have, but until you appreciate why that might be it can be hard to work out the importance of it. As it happens, there are many important reasons that a business should have a financial forecast – and it is one of the very first things you should do if you hope to build a strong business from the ground up.
Actually, having a financial forecast is absolutely critical to starting a business and increasing its chances of success. If you look at the failed businesses that have been and gone, it is very often a case of not planning for the future in some way or another, and especially not planning for any potential pitfalls that may arise. A good financial forecast will help you avoid that fate.
Beyond that, the advantages of having a financial forecast include:
- Improved security.
- Better growth.
- A chance to prepare for pitfalls.
- Identify problems early on.
- Be ready for the future.
At the same time, if you don’t have a financial forecast for the future, especially at the start of your business, then you might find that you struggle to grow your business in the healthy way you would want to, and that you are basically stepping into the dark.
How To Put A Forecast Together
By now, you are probably convinced that having a financial forecast is a positive thing, and that you can’t really function properly without one. But that is only half the battle of financial forecasting. You also need to understand how to actually put a financial forecast together, and this is something of an art and a science which does take a lot of practise and understanding before you can get it exactly right. Let’s look now at how you might expect to put a financial forecast together, and what it is that is actually going to be important to focus on here to get it right.
In order to manage a good forecast, you need to be aware of a number of factors at once. These might include, but are not limited to: revenue, direct costs, fixed and variable expenses, AR and AP timing, debt servicing, other assets and liabilities which might crop up in the future or which you might otherwise need to be aware of. After all this has been collated and brought into the equation, it is then a matter of actually putting the forecast together, which has a specific process that you will need to be aware of in order to get it right and make sure that it does for you what you need it to.
First, a profit and loss statement is put together, which is the basis from which the forecast will be determined. Then a cash flow and balance sheet needs to be drawn up, which is something that your accountant should hopefully be doing anyway. Along the way, it is important to understand what your specific goals are, so that you can work out whether you are really falling in line with them or not. This is the only way in which you can make sense of what your forecast is and whether it is a good one or not. It is also important to recognise that forecasts evolve and change over time, and that you need to keep them updated for that very reason, otherwise they are not really going to mean anything at all. As long as you are aware of that, however, you should find that you are able to get much more out of them.
That is the basic process of setting and keeping a forecast. But in order to really get the most out of a financial forecast, you also need to appreciate when and how you should use one in order to drive your business’ results and achieve your desired goals. Let’s look at that next.
The When & How Of Financial Forecasting
Once you are clued up on exactly how you should be making a financial forecast, and you understand exactly what it is that it might do for you, you can then think about some of the details regarding when and how you should use one in order to provide the maximum benefit to your business on the whole. Arguably, the most important time to set up a financial forecast is at the very start of the business, once you have set everything up and you have the records and assets and so on to collate. Having a financial forecast at this time will ensure that you are going to know where you are heading straight away, which is a very useful position to be in.
Beyond that first initial forecast, you will also want to have one done at regular intervals as a matter of course. A good rule of thumb is every six months, or once a year at the very least – a financial year, that is. You should also consider having a financial forecast done whenever you are planning on making any considerable changes to how you do things, what you are selling, your branding, and so on, and after you have done those things too. This helps to keep you aware of what is actually going on in your business and how the decisions you are making are affecting your company in the future.
As long as you do all that, you can be sure that your financial forecast is going to be a huge help for your business. Done right, it can be one of the best ways to keep your business moving towards its goals, while avoiding many of the pitfalls that can come along for any company. Bear this in mind, and work on your financial forecast as soon as possible.