The Roman philosopher and statesman Lucius Annaeus Seneca once said that “If one does not know to which port one is sailing, no wind is favorable.” Although this is a true statement in many ways, knowing how the wind will be on the journey to the desired port is critical. Every business needs a detailed business plan so everyone in the venture knows where they are going and how they plan to get there. However, along the path, every business needs to understand what they face along that journey. That’s why financial forecasts are so crucial. They allow businesses to see how they are faring on their journey. Having this financial plans from forecasts allows the owners of firms “to track actual events against the financial plan and make adjustments as the year passes.”1
The Government Finance Officers Association describes a financial forecast as “a fiscal management tool that presents estimated information based on past, current, and projected financial conditions.”2 It’s value lies as a resource that enables management to identify future revenue and expenditure trends that affect strategic goals and various departments functional capabilities. Well made forecasts allow for “improved decision-making in maintaining fiscal discipline and delivering essential community services.” Here are a few areas that financial forecasts are valuable to.
Financial Forecasts Functions
- Establish a sales projection
- Set up a production schedule
- Calculate your other expenses
- Determine your expected profit
Despite financial professionals ability to provide 100 percent accurate financial forecasts, firms without them face potentially massive issues. These may include outspending budgets, allocating funds where they are not needed, and the inability to make accurate strategic decisions in and outside of financial operations. In short, financial forecasts are “invaluable to the owner in order to keep the business out of financial trouble in a changing economic environment.”3
As you look to develop your financial forecasts, pay attention to the key variables and issues that need to be addressed. Here are a few points TOP CFOS addresses when making our clients forecasts.
Questions to Ask When Creating Financial Forecasts
- What is the time horizon of the forecast?
- What is the objective of the forecast? For example, a conservative forecast underestimates revenues and builds in a layer of contingencies for expenditures. This might make it harder to balance the budget, but reduces the risk of an actual shortfall. On the other hand, an objective forecast seeks to estimate revenues and expenditures as accurately as possible, making it easier to balance the budget, but increasing the risk of an actual shortfall.
- What are the political/legal issues related to the forecast? Be aware of current laws or expected changes in laws that affect forecasts.
- What are the major revenues and expenditure categories?
Although it takes a substantial amount of time and money to make a financial forecast, every business needs one to succeed. At TOP CFOS we work with our clients to create give them most accurate financial vision and the most competitive financial strategies. Reach out to us today and learn how we can help your business.