Financial forecasts are vital to the success of your business. But what are they? And why are they important?
What Are Financial Forecasts?
Financial forecasts are essential tools that allow you to present, analyse, and track the future of your business. Your financial forecast is a vital tool that is at the heart of all your business decisions. Whether you are raising finance, business planning, or assessing a decision, the likelihood is that you will need a financial forecast to support your case.
The main purpose of a financial forecast is to provide users with information about the financial performance of a business. This information is used to assess the financial strength and can determine many core attributes of the business. That is why financial forecasts relate back to an accounting structure to allow quick understanding and deriving conclusions.
Financial forecasts are one of the most crucial tools to succeed in business. If built correctly, your financial projections can be invaluable in understanding, presenting and managing your business. They can help you manage your cash, negotiate with suppliers, build your team, and be the basis of the valuation of your business.
How Many Financial Forecasts Do I Need?
Financial forecasts are not about arriving at a concrete outcome—the numbers are not final—but they equip you to understand the dynamics and relationships within your business and what really drives value. More than anything, they show you that you are not shooting in the dark. You have a trajectory and a target of when and how you will get there.
This means you may need several financial forecasts throughout your business year, as your numbers change, and your purpose for your forecasts change too. If you are trying to secure an investor or figure out your finances after a change in circumstances, then you may need a new financial forecast.
What Are the Reasons to Build Financial Forecasts?
Here are six reasons to build financial forecasts.
Opportunity Assessment 🦄
Forecasts are critical to assessing opportunities and threats. An opportunity may look too good to pass but do the numbers stack up? A financial forecast can give you that go / no-go decision.
Business Planning 🎁
To enable management teams and business owners to effectively manage their business and deliver their plan. From building teams, negotiating with suppliers to setting your prices; a financial forecast will give you comfort in the choice you make.
Target Setting 🎯
A business should always be setting targets as this is the measurement of success, if you go beyond your estimations – use forecasting to put your line in the sand. This is also important for your shareholders to show them the direction of travel.
Raising Investment 💸
You need to approach investors with a sound logic and rationale for your valuation and potential. A financial forecast will give you the power to fully articulate your idea or plan. It is important for start-ups to know and understand how the Valuation process works so that they can confidently explain their numbers.
Risk Identification ⚖
Risks are everywhere in business. Financial forecasts help you navigate these challenges by assessing impacts of what if scenarios and ensure that you have enough cash for the rainy days.
Idea Validation ✅
Is your idea an economically viable business? A forecast will enable you to quantify and validate your business plan and business model, assumptions and vision.
Ultimately, a well built financial forecast will enable you to make better business decisions and plan for the future.
Why You Need a Financial Forecast
Without forecasts, you’re flying blind. You are not able to stress-test pricing or look at alternative scenarios. This is where a robust finance model can superpower you and your team to the next level of understanding of the future. You’ll also have a better grasp on the “what if?” scenarios, where things could go wrong. Getting your financial forecast sorted as soon as possible will only bring you better chances of success. Good preparation can be the difference between sink or swim.