Why a Financial Forecast Is Essential for Your Business

 A part-time CFO may be what your business needs to navigate today's complex business environment. Business leaders and CEOs are busy. With little precious time, it can seem impossible to add one more thing to your plate. Financial forecasts may be common knowledge, but few CEOs actually have the time to build a financial forecast for their business. From lack of time to a shortage of resources, there are many reasons you may not have a financial forecast already.

However, this simple tool can work wonders for the future of your business and provide the competitive advantage you need to succeed. Keep reading to learn why a financial forecast is important and how to build one without wasting your time.

What is a financial forecast?
Financial forecasts are most commonly used to predict the financial outcomes for a company. The expenses and income for a business are estimated over a certain period of time, typically one year. Historical data, including accounting and sales, as well as external data from the market or key economic indicators can be used to develop a financial forecast.

Companies utilize financial forecasts to set expectations for the future and determine what is realistically 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 your focus and effort is spent on seeking new business opportunities, investing in marketing and sales, and looking for new avenues of growth. All of these pursuits are worth your time, but they leave little room for much else.

Financial forecasts get shoved to the backburner all too often. While business leaders recognize their importance, and even intend to create forecasts, they are overlooked due to more pressing matters. A financial forecast may not help you instantly move the needle in the same way other executive moves can, but it will set your business up for long-term success. Financial forecasts provide more than just a simple outlook for the future. They offer a roadmap for your business to follow, setting goals and measuring success along the way.

Gain a clear direction for the future
You likely have sales targets, revenue goals, and growth strategies in plan for the foreseeable future. Reporting for each month, quarter, and year is common among businesses. In fact, it is so common that it often turns into a 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 setting arbitrary goals. Creating a financial model forces you to put concrete plans and expectations down on paper. 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 one year? Are you moving towards your big-picture 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 company. Also, taking purposeful steps can make you more likely to reach your goals than wondering aimlessly.

Adjust early and often
In business, companies that can pivot are able to survive. Businesses that cannot make adjustments as needed will quickly fall behind the competition. Thankfully, a well thought out forecast can help position you to make adjustments quickly and often. Even the most thought-out plans hit roadblocks from time to time, so preparing for change is essential.

When you build a sound forecast, you set a target or a goal. Over time, you may find yourself moving towards that target too slowly or faster than expected. You may also realize that the initial target you set no longer makes good business sense. Whatever the case, having a financial forecast enables you to line up your expectations with reality.

The sooner you can identify mistakes or notice when things go off-target, the faster you can make the necessary adjustments to get back on course. Instead of reviewing your company's performance at the end of the year, when it is too late to make changes, use a financial forecast to provide accountability along the way.

Focus on the right KPIs
You likely have countless reports and files of data sitting on your computer. As a business leader, analyzing your company's performance is a key part of your job. However, there are likely some numbers or metrics 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 for your business, you can more accurately determine your progress. You can also recognize shortcomings earlier because they are no longer buried under mounds of unnecessary data. Dialing in on your KPIs provides an added 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 great risk. Investing time and money into a project that does not bring about results can drain your resources, and so can successful ventures that are not planned properly. Forecasts can help you work through what-if scenarios, determining what the result might look like if an initiative succeeds or not.

With the numbers from your forecasting, you can also more accurately predict what the outcome of a scenario would mean for your business. How will it impact the rest of your organization? Financial forecasts enable you to test your theories and walk through ideas without taking a major risk or wasting resources.

Work smarter when you know your numbers
Financial forecasting might sound all fine and good, but what do you do if you do not have the time or resources to build your own? Business leaders can work smarter by contracting out their financial forecast. You do not have to invest in hiring a full-time employee, and you leave your schedule open to focus on running your business.