A financial forecast identifies trends in internal and external historical data and projects those trends in order to provide information to key decision-makers about what the financial status of the company will likely be at some point in the future.
In order to fully understand your financial position, you will need to understand at least three financial statements in both the past and the future. These three statements are: Profit and Loss Statement, Balance Sheet, and Cash Flow Statement.
These statements show how your business has performed up until this point. By understanding them properly, they will give you insight into what changes you need to make in order to improve future performance.
Projecting these statements typically comes in two forms: a forecast and a budget. While these two projects are similar and related, they offer different purposes.
A budget is a roadmap of what you are aiming to achieve and how you intend to get there. This provides a lot of insight into resource requirements and key milestones you need to reach in order to achieve your goals. Budgets are usually created on an annual basis.
A forecast is updated on a regular basis (e.g. monthly) and gives you the latest view of what you expect to happen based on current realities. Forecasting plays a critical role in calculating the financial needs of your company and can help you decide what capital is required to be successful. When applying for capital such as a bank loan or venture debt, these forecasts will be a necessity.
A budget is your target and expresses a plan of what you want to achieve. By identifying what you are trying to achieve and how you plan to get there, you will be able to start charting the course, which will involve identifying resource requirements and milestones you need to reach in order to get there.
"A budget is telling your money where to go instead of wondering where it went."
Dave Ramsey
A critical component of successful financial forecasting is continually checking in to compare your budget against actual results. By monitoring for any variances, you will be able to gain helpful feedback so you can take corrective action and adjust accordingly to get back on track.
Having a true, holistic understanding of a company’s business position is key to making accurate and correct decisions. Financial projections help make these informed decisions and will remind you to keep looking ahead – making you more likely to see any market changes or competitive challenges on the horizon.
Part of growing a successful company is raising money. Financial forecasting plays an important role in calculating a company’s financial needs by making accurate predictions about what capital your business needs in order to reach its goals. Capital lenders such as venture debt firms will require financial forecasts during the initial screening of the company.
Well-constructed forecasts will help you identify your company’s key drivers, which are typically only made up of 3-4 critical numbers. Financial models with clear key drivers allow you to see what impacts result from changes and are often used to introduce sensitivities into forecasts, including best, worst, and expected scenarios.
Although strategic finance leaders are veterans at planning in the face of uncertainty, some periods are more uncertain than others. You can’t always plan for everything, so it’s normal to feel some added pressure these days.
Successful uncertainty planning ultimately comes down to being able to quickly revise financial and operational plans by leveraging your data and analytics capabilities.
Here are 5 tips to financial forecasting during uncertain times:
As mentioned before, scenario planning is a great way to test the implications of your business plans against assumptions about existing and future scenarios. Making agile models will also help you assess the impacts of those things on metrics such as revenue, costs, and cash flow. Scenario planning is an effective way of focusing in on critical metrics and their impacts on your company’s performance, providing you the insights you need to make tough decisions quickly and confidently.
Agile forecasting is the best way to adapt your business quickly, consistently, and intelligently to unexpected changes in market conditions. It involves being able to re-forecast on the fly based on real-time actuals and business drivers. Identifying key performance trends on-demand and modifying plans quickly is key to providing business leaders a reliable prediction of how market conditions today will influence the bottom line.
Here are some key things to implement:
Ensuring your business has enough cash on hand to weather downturns and periods of uncertainty is a responsibility every finance person has. Effective cash management is the key difference between weathering the storm or being sunk by it. While scenario modeling around cash flow should be a natural priority, here are a few other things to consider:
People: Lean on members of your team that can combine their skills in technology and financial management principles in order to develop optimal solutions. Additionally, you should be speaking with your people on the ground who can give you instant insights, which may otherwise take weeks to be reflected in the metrics you track.
Processes: Capture, store, and aggregate all of the data necessary within a tight and streamlined process to make thoughtful business decisions.
Technology: Data accessibility, analysis, and visualization are critical components to turning data into insights and presenting them to management in a way they can easily understand and put into action. Combine internal and external, financial and non-financial data into a single source that can be easily accessed for a full view of the business. After analyzing the data, use data visualization tools such as Microsoft Power BI or Tableau to present the data in a way that is compelling and easy to digest.
A common theme throughout this article has been to communicate with your company’s leadership team on a frequent basis. Each meeting should be used to take a detailed look at what the business is doing, what metrics are moving, and what your data is telling you.
Financial forecasting can be one of the most challenging aspects of corporate finance and is especially difficult during periods of uncertainty. In order to help navigate your business through this critical time, focus on leveraging all of the relevant data you have, turning that data into insights, and frequently revising financial and operational plans based on those findings.
