A part-time CFO may be just what your business needs to navigate today’s complex business environment. Business leaders and CEOs are busy. With so little time precious, it seems impossible to add one more thing to your plate.
Financial forecasts may be common knowledge, but few CEOs actually have the time to make financial forecasts for their businesses. From a lack of time to a lack of resources, there are many reasons why you may not have a financial forecast.
However, this simple tool can do wonders for the future of your business and give you the competitive edge you need to succeed. Keep reading to learn why financial forecasts are important and how to make them without wasting your time.
What is a financial forecast?
Financial forecasts are most often used to predict a company’s financial results. Expenditures and revenues for a business are estimated over a specified period of time, usually one year. Historical data, including accounting and sales, as well as external data from markets or key economic indicators can be used to develop financial forecasts.
Companies use financial forecasts to set expectations for the future and determine what is realistically possible for the business. Financial forecasts can also be specific to a particular business area. For example, a company may develop a financial forecast for sales.
Why should you make a financial forecast?
As a CEO or entrepreneur, your time is very valuable. Much of your focus and effort is spent on finding new business opportunities, investing in marketing and sales, and seeking new growth avenues. All of these pursuits are well worth your time, but leave little room for much else.
Financial forecasts are pushed back too often. While business leaders recognize their importance, and even intend to make forecasts, they are ignored because of more pressing issues. Financial forecasts may not help you instantly move in the same way as other executive moves, but they will set your business up for long-term success. Financial forecasts provide more than a simple outlook for the future. They offer a roadmap for your business to follow, setting goals and measuring success along the way.
Get a clear direction for the future
You most likely have sales targets, revenue goals, and growth strategies in your plans for the 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 thinking 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 to set arbitrary goals. Creating a financial model forces you to put concrete plans and expectations down on paper.
A one-year financial forecast based on your current business path and trajectory is a great place to start. Pay attention to where your business will end up if things continue. Do you want your business to be there within a year? Are you moving toward your big picture goal?
A financial model provides a visual representation of the future of your business, so you can decide if there are things that need to change. Approaching your business goals with intent, instead of falling into old patterns, can give new life to your company. Also, taking purposeful steps can make you more likely to reach your goals than aimlessly wondering.
Adjust early and often
In business, companies that can pivot are able to survive. Businesses that cannot make adjustments as needed will soon be left behind in the competition. Fortunately, careful forecasting can help put you in place to make adjustments quickly and often. Even the most mature plans run into snags from time to time, so preparing for change is important
When you make a voice forecast, you set a target or goals. Over time, you may find yourself moving towards that target too slowly or faster than expected. You may also notice that the initial target you set no longer makes business sense.
Whatever the case, having a financial forecast allows you to adjust your expectations to reality.
The sooner you can identify mistakes or notice when things are off target, the sooner you can make the necessary adjustments to get back on track. Instead of reviewing your company’s performance at the end of the year, when it’s too late to make changes, use financial forecasts to provide accountability along the way.
Focus on the right KPIs
You may have countless reports and data files on your computer. As a business leader, analyzing your company’s performance is an important part of your job. However, there are likely to be some numbers or metrics that you value above others. By creating financial forecasts, you can highlight the key performance indicators that make the most sense for your business and eliminate the rest of the mess.
By focusing your attention on the KPIs that are driving the needle for your business, you can determine your progress more accurately. You can also spot flaws early because they are no longer buried under piles of unnecessary data. Contacting your KPIs provides an added level of focus for your business, helping you gain an edge over the competition.
Plan multiple scenarios
Ideas, big and small, are what keep a business going. However, tackling a new idea can be a big risk. Investing time and money into projects that don’t pay off can drain your resources, and so can a successful venture that isn’t well planned.
Forecasts can help you work through what-if scenarios, determining what the outcome will be if an initiative is successful or not.
With the numbers from your forecast, you can also predict more accurately what the outcome of a scenario will mean for your business. How will it affect your entire organization? Financial forecasts allow you to test theory and execute ideas without taking huge risks or wasting resources.
Work smarter when you know your number A financial forecast may sound well and good, but what do you do if you don’t have the time or resources to build one yourself? Business leaders can work smarter by contracting out their financial forecasts. You don’t have to invest in hiring full-time employees, and you leave your schedule open to focus on running your business.
A part-time CFO can develop your financial forecasts, giving an unbiased view of your data. You can work with the CFO only when needed, paying a fraction of the in-house executive fee. Experienced consultants, such as those at K38 Consulting, bring industry-specific expertise to help you realize your growth potential and build financial forecasts.