If you want to succeed tomorrow, you must consistently look to tomorrow. Goals cannot be set in a vacuum. Rather, they must be made in context. For this reason, financial forecasting is a key component of your company’s growth strategy.
While goal-setting for the future is vital, even the best-laid plans are irrelevant without having an accurate forecast of the market and other financial indicators.
Financial forecasting is the process of predicting realistic future possibilities, rather than just hoping for them. By predicting future financial performance and data through a complete analysis of past and present data, financial forecasting puts strategic goals in perspective by bringing a business’s history, positioning, and resources into the equation.
Foundations of financial forecasting
Knowing that forecasting is necessary is just the first step. Next, you must understand what to forecast, and what company data to draw from.
While every financial forecast is as unique as the business being analyzed, financial forecasts typically begin with an analysis of past and current financial statements, including:
- Income (P&L) statements
- Balance sheets
- Cash flow statements
- Working capital
From these metrics, your business can establish a baseline, telling you where your company is likely to be in the future, assuming you continue on your current trajectory. It will inform you of the resources you need, and the management that will be necessary to respond to what the data says.
Benefits and limitations of financial forecasting
Financial forecasting is a powerful business activity that comes with countless benefits. Here are some of the reasons to get your finger on the pulse your company’s projected future performance:
- Better inventory management and resource planning
- Ability to identify overlooked areas in the business
- Spotlight on well-performing products and service offerings
- Chance to look at sales patterns, whether seasonal or otherwise
With that being said, it’s important to keep in mind that financial forecasting is not a perfect science. At the end of the day, financial leaders and advisors are analysts and strategists, not fortune tellers!
The future is uncertain at the end of the day, and there are many factors that could come into play, from unforeseen market changes to fluctuations in internal resources, and everything in between. However, financial forecasting is still vital to your company’s health, as the forecast provides in-depth, data-driven insights to guide business strategy and direction.
Future focused forecasting
While forecasting for the future and planning accordingly is necessary for businesses great and small, it alone still arguably falls under the ‘management’ category.
Financial forecasting is, and should be, at the very core of future focused accounting. The difference lies in changing your approach from one of a manager, to one of a leader, by using forecasts as conversation openers, not conclusions.
Rather than simply managing your current reality or recovering from a downturn, what if you used your financial forecasting to drive change? In other words, start changing the conversations in the boardroom from ones of ‘where are we going?’ to ones of ‘where COULD we be going?’
By looking at financial forecasting as the jumping off point for developing your growth strategy, the possibilities transform from predictable to endless.