The Uses Of Financial Forecasting And Why It’s Important To Your Business
October 1, 2020
When you’re running a business, there are undeniably many challenges that can come along with that. The base aim of any business is to generate profits and growth. Often, this is easier said than done, and many business owners feel themselves hitting a wall where they don’t know where to go next. If this happens to you, there are several things you can do to combat this. One such thing is financial forecasting. In this post, we’ll take you through what it is, the uses of financial forecasting, and why it’s so important to any business.
What is financial forecasting?
To put it simply, financial forecasting is a part of planning that truly no business can afford to ignore. It’s the process of using past financial performance and the current market and situation to predict how a business will perform financially in the future. Then, business owners can use this information to set goals, financial and otherwise. There are many elements that go into a financial forecast, including:
Your businesses monthly financial statements
Any risks and opportunities you see coming up
Any obstacles that might come up and how you can navigate them
What you are doing, or can do, to make the most of opportunities alongside minimising risks
What resources you have (of any kind) that can help make your future forecast a reality
Actions you can take or are taking to minimize risks and capitalize on opportunities
Forecasting has both similarities and differences from budgeting, but the two are very much distinct concepts. Budgeting is used to show where the finances of a business want to go and set out the goals and expectations for the future. On the other hand, financial forecasting is used to show and tell what direction a company is actually headed in, based on past and current financial performance. So, what can this type of forecasting be used for? We’ll look at that next…
The uses of financial forecasting and why it’s so important
Financial forecasting should be a major part of any business and its planning strategies. It has so many benefits and uses and can definitely be one of the most important tools you can utilise in your business. We’ve laid out just a few of the uses here and why it’s an important thing to do for your business, big or small:
So, this has already been briefly mentioned, but the main use of financial forecasting is planning. In fact, it is a type of planning in itself. In business, planning is key if you want to achieve growth, and this is a very important part of it. It helps companies decide on their budgets for the future, as well as forecasting any blips that may occur and would need to be planned for. Furthermore, it also helps planning in the long run. It helps you to see long and short term trends that may affect your business, financially or otherwise.
If you’re looking to initiate business growth, your finances are one area that is probably very important. For many people, the marker of true business growth comes with an increase in revenue and profits. But how can you get there if you don’t know where you stand? Financial forecasting can help you do just that, as well as predict the sort of growth that may be achievable for you. For this reason, it’s incredibly important to any business going through growth, or looking to do so in the future.
Help inform your budget
This is another one of the uses of financial forecasting that we have already briefly touched on, but it’s important to mention again. So, your budget is the plan you set out for where you would like your finances to go. This then allows you to set and quantify goals your business should reach. But how can you know what is realistic to budget if you don’t have a super-clear picture of your finances?
Financial forecasting forces you to go through your company’s financial history and current situation with a fine-tooth comb. This means that you will get that detailed picture you need for budgeting. It makes the whole process a lot easier. So, while it definitely takes time and effort to produce an accurate forecast, it really can influence you in other areas of your business and make those jobs easier! It’s an investment in your business and its future that will pay off in so many ways if it’d done correctly.
Make better decisions
Furthermore, one of the great uses of financial forecasting is its ability to help you make better decisions! This is because it gives you a clear picture of the past and present, which you can use to inform your future. When making big business decisions, it’s important to have as much information as possible to hand in order to make the best and most informed decisions. And, the financials are a very important part of that.
Having a clearer picture is so helpful when guiding your business and its future. And, financial forecasting can help with decisions such as, is now a good time to grow? Can we take on more staff? Should the business take on a new direction? And so many more. In fact, without accurate and comprehensive financial forecasting, these decisions will be made all the more difficult!
Help gain interest and investment
There comes a point in the lifecycle of many businesses when their owners look to seek outside investment. One of the uses of financial forecasting is to help you make this jump and attract the interest and investment that you need. Anyone who is potentially interested in coming to your business and investing their money will want to see your financial forecast, in order to give them a clearer picture. So, if you’re looking for investment or want to in the near future, making sure that your forecasts are up to date should be an integral part of your plan!
Financial forecasting brings up questions and goals
A good financial forecast should throw up all sorts of questions for your business to answer. Furthermore, it will also answer questions you may have previously had about the state of your business. For example, it will help to answer questions such as how long will it take until debts are repaid? And, what does the financial future of the company look like? Some of the questions a good forecast will pose to you include, what can you do to improve revenue? Are there any uncertainties that you need to address in order to move forward? And, what risks are in the future and how can you plan to mitigate them?
It’s important to have these questions answered and also be able to plan for any more that arise. This is vital for business planning, including looking at how to reduce risks and improve your business ready for growth. Planning is all about asking questions and coming up with the best strategy to answer them, and financial forecasting can help you do just that!
How can I ensure that my financial forecasting is accurate?
Many business owners know the uses of financial forecasting and that it’s highly important for them to carry out. However, it does come with some concerns as well. For example, some people worry that they don’t know enough to carry out the forecasting in the first place. Others may have concerns about their abilities to put plans and strategies into place off the back of the forecasting.
Having said this, there is a lot of support available out there to help you with your forecasting journey. Even if you can carry it out on your own, your business may get to the point where it’s not sustainable, and you need outside help to make the best use of your resources and time. Enlisting professional help when it comes to forecasting is often a great investment. It takes this task, which can be lengthy and involve a lot of effort, off your hands and allow you to focus on the more important things. Finding the right people for the job is vital, but it really can make a big difference to your time, confidence, and business direction and planning!
Here at Chrysalis Partners, we are experts in helping small and medium-sized businesses grow. Our network of professionals and over 50 unique methods help to give you clarity and plan where your business is going next. If you’re feeling lost when it comes to the uses of financial forecasting, we are here to help. But how does it work?
We have a hybrid model of coaching and consulting which means we have programs to suit every budget and every type of small to medium-sized business. Our services range from advisory to more hands-on development of marketing and sales materials.
You can benefit from support on a regular and ongoing basis, or receive help on specific projects you’ve identified. Whichever approach you choose, we use the same 50+ fully-defined and proven methodologies that are written as easy to use, step-by-step guides.
These guides cover the full spectrum of marketing and sales strategies that can and should be put in place for your business to aid growth, all at no or low implementation cost. These are supported by workshops and sophisticated techniques for improving all of your business operations. Contact me today at firstname.lastname@example.org or complete the contact form here and I’ll get back to your shortly to discuss your individual requirements.
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