Why a Financial Forecast is Essential for Your Business

A part-time CFO may be just what your company needs to navigate today’s complex business environment. Business leaders and CEOs are busy. With precious little time, it may seem impossible to add one more thing to your plate. Financial forecasts may be common knowledge, but few CEOs actually have the time to create 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 give you the competitive edge you need to succeed. Read on to learn why a financial forecast is important and how to create one without wasting time.

What is a financial forecast?
Financial forecasts are most commonly used to predict the financial results of a company. A company’s expenses and income are estimated over a certain period of time, usually a 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 truly possible for a business. Financial forecasts can also be specific to a certain area of ​​the business. For example, a company may 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 goes into seeking new business opportunities, investing in marketing and sales, and finding new avenues for growth. All of these activities are worthwhile, but they leave little room for much more.

Financial forecasts are too often relegated to the background. While business leaders recognize their importance and even intend to create forecasts, they are overlooked because of more pressing issues. A financial forecast may not instantly help you move the needle the way other executive moves do, but it will set your business up for long-term success. Financial forecasts provide more than just an outlook 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 targets, revenue targets, and growth strategies planned for the foreseeable future. Reports for each month, quarter and year are common among companies. In fact, it’s so common that it often becomes routine. Have you stopped to think lately about why you project the numbers you do or what the overall goal is for your business?

Without a clear direction for the future, you are left with arbitrary goals. Creating a financial model forces you to put concrete plans and expectations in writing. A one-year financial forecast based on the current path and trajectory of your business is a great place to start. Pay attention to where your business will end up if things continue as they are. Is that where you want your business to be in a year? Are you moving toward 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, instead of falling into old patterns, can breathe new life into your business. Plus, taking purposeful steps can make you reach your goals more likely than wondering aimlessly.

Adjust early and often
In business, companies that can pivot can survive. Businesses that can’t make the necessary adjustments quickly will fall behind the competition. Fortunately, a well thought out forecast can help position you to make adjustments quickly and often. Even the most thought-out plans run into roadblocks from time to time, so preparing for change is essential.

When you create a strong forecast, you set an objective or goal. Over time, you may find yourself moving towards that goal too slowly or faster than expected. You may also realize that the initial goal you set no longer makes business sense. In any case, having a financial forecast allows you to align your expectations with reality.

The sooner you can identify mistakes or realize when things are off target, 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 on your computer. As a business leader, analyzing your company’s performance is a key part of your job. However, there are probably some numbers or metrics that you value above the rest. By creating a financial forecast, you can highlight the key performance indicators that make the most sense for your business and cut out the rest of the clutter.

By focusing your attention on the KPIs that move the needle in your business, you can more accurately determine your progress. You can also recognize shortcomings sooner because they’re no longer buried under piles of unnecessary data. Marking off your KPIs provides an extra 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 businesses running. However, tackling a new idea can be a big risk. Investing time and money in a project that doesn’t produce results can drain your resources, just like successful businesses that aren’t planned properly. Forecasts can help you work through what-if scenarios, determining what the outcome would be 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 forecasts allow you to test your theories and analyze ideas without taking significant risk or wasting resources.

Work smarter when you know your numbers
Financial forecasts may sound great, but what do you do if you don’t have the time or resources to create your own? Business leaders can work smarter by hiring their financial forecast. You don’t have to invest in hiring a full-time employee, and you leave your hours open to focus on running your business.

A part-time CFO can develop your financial forecasts, providing an unbiased view of 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 insights to help you realize your growth potential and create financial forecasts.