If Your Company Doesn’t Have a Financial Forecast then You’re Wasting Time and Money
Every company has goals. Where do you want your organization to be 5 years from now? 10 years?
Most even have a general idea of the benchmarks you need to hit to get there—by increasing revenue to $15M by August 2018, adding x number of new products next season, etc.
However, if your company doesn’t have a detailed financial forecast telling you how to get from one benchmark to another, then chances are you’re wasting extensive money and resources. You’re also missing out on a huge advantage for success.
Why Every Company Needs a Financial Forecast
The number one mistake most organizations (and even many outsourced CFOs make) is making their financial strategy more about “accurate present and historical data” than about future plans.
Every company understands the importance of financial record keeping. What is our organization’s health to-date? Are we making money or losing money? Can we pay our financial obligations? Do we have good news or bad news to report to shareholders?
Having accurate and up-to-date financial records is vitally important for day-to-day operations. However, having an accurate financial forecast can be the difference between success and failure for a company.
Financial Forecasts Should be Kept Up-to-Date and Regularly Referenced for Budgeting and Strategy Analysis
If you’re like most companies then chances are you have one of the following:
- KPIs or goals related to finances that you use as guideposts for defining monthly or yearly targets
- A financial forecast (possibly written during fundraising or to qualify for a loan) that is outdated, inaccurate, or has become forgotten
The difference between a complete and accurate forecast compared to an incomplete or inaccurate one are astronomical. In a 2005 study by the Institute of Business Forecasting, they found that an improvement in accuracy of just 1% from under-forecasting or over-forecasting resulted in an annual savings of $970,000 – $3,520,000 a year for the companies that participated in the study.
While the study was conducted with large companies and the results will vary based on a company’s current strengths and weaknesses, the analysis remains true regardless of company size that there is a cost due to inefficient use of assets, and the cost that can be significantly reduced through more accurate forecasting.
3 Reasons you Need a Financial Forecast:
Are you still unconvinced about whether you need a financial forecast? While most companies hope for the best, prepare for the worst, and accept whatever comes, a forecast allows a more predictable outline of events. A forecast is a blueprint for how to get from point a to point b. It uses historical data and educated analyses of industry and comparable company trends to spell out your next moves and predict the outcomes. Instead of trying to manage whatever comes, a forecast gives you the reins so you can more predictably (and sustainably) maneuver your company where you want to go.
1 – Financial Forecasts Create a Clear Path to Achieve Your Goals
Success guru, Darren Hardy, relentlessly touts the importance of having a direct, defined path from where you are to where you want to go. In his book Living Your Best Year Ever, he describes the difference between having a long-term plan and lacking a long-term plan.
In his story, he describes how a group of people raced across a field. Three of the racers approached the edge of the field and, keeping a studied eye on their feet and the ground directly in front of them, intentionally took step after step through the field. Many steps passed and they looked up to measure their progress only to see that they had zigzagged and wandered through the field and were still far from reaching their goal. The second group, however, was already across the field. How did they get there? By keeping their eyes trained on a tree on the other side and taking step after deliberate step toward that tree.
It’s not enough to know you want to take good steps every day; you need to know exactly which steps to take to get where you want to go. Think of it like building a house. It’s not enough to know that you “just want to build a house,” or even to know exactly what you want it to look like when it’s complete. It’s not even enough to have a basic idea of the framework. Without having a clear plan for materials, labor, not to mention a design for electricity, ductwork, and plumbing, you’ll waste excessive time and money. You will probably also end up with a house that achieves only a fraction of the potential it could fulfill otherwise.
2 – A Financial Forecast Creates Trust and Confidence in Raising Funds
Whether you have growth contingent on investors or loans, most companies at some point or another have to raise capital. They must present their company to a panel of decision-makers who will ultimately control whether or not they will provide the money for that growth.
Common misconceptions about fundraising are that financing is about the story, the relationships, or luck. In reality, it’s much simpler than that: Financiers are looking for a company that knows exactly how it’s going to succeed. We don’t mean a company that says “We’re good because we’re good;” we mean a company that says, “This is where we’re going and this is how we’re going to get there.”
Success isn’t an elusive mystery–it’s quite simply defining goals and figuring out exactly what has to happen to achieve those goals. After that, all you need is consistency and tenacity in taking the steps from where you are to the achievement of those goals.
As Darren Hardy says, “A genius can still get lost without a map. Even a blockhead will beat the genius as long as he has a map and a plan.”
3 – A Financial Forecast Tells you What Resources You Need (and When)
If you’ve recently had the conversation “What (cash investment, materials, employees, inventory, sales, etc.) will it take to get x done?” then you’re already behind the curve. A great forecast tells you what resources you need, when you need them, and how you’re going to pay for them (if relevant).
One of the major factors of inefficiency within a company is failure to know exactly what resources are needed at any given time. Whether the resource in question is cash funding (how much do you need to make sure you don’t run out before your next funding round?), personnel (how many employees do you need to prevent overstaffing or understaffing to achieve this quarter’s goals?), or materials, your company will benefit a great deal with a clear idea of the “hows” and “whens.”
Financial Forecast Tip: Be Flexible. Planning the Future is Different From Predicting It
Intelligent forecasting is the closest you will get to a crystal ball, but no forecast is plug-and-play. Even though your forecast intelligently details how to achieve your goals, the greater the degrees of inaccuracy, the greater your wasted resources and inefficiency. Forecasts are meant to be a living document. An experienced CFO will use the forecast to guide a monthly and yearly budget, then regularly compare actuals to forecast to ensure your goals are on track.
Your Forecast Doesn’t Need to be an Overwhelming Project
Many small businesses lack an accurate forecast (or a forecast at all) simply because a forecast can be difficult to put together. They likely don’t have an in-house CFO with the tools or knowledge to create such a forecast, not to mention to keep the forecast accurate and updated. However, by utilizing an outsourced CFO, businesses regardless of their existing financial team can experience the massive positive impact of a financial forecast.
What is the state of your financial forecast? We’d be happy to help! Schedule a free, no-obligation consultation with one of our CFOs.
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