5 ways financial forecasting could save your business
“A financial forecast is an estimate of future financial outcomes for a company or project, usually in the context of budgeting, capital budgeting and/or valuation.”
Any and every business has goals – where would you like your organization to be in 5 years? 10 years? You’ll likely have benchmarks along the way that you’d like to hit.
For example, £xxx turnover by 2025 or £xxx in profit by next season.
If you don’t have a detailed financial forecast to keep you in check, you may soon be feeling like you’re driving somewhere with no map. From day-to-day operations, to long term planning, here are 5 ways that your business could benefit from financial forecasting:
- It demonstrates the financial viability of your business
If you’re looking for funding, business premises or to pitch to investors, you’ll need some data. A detailed financial forecast explains the future trajectory of your business and what the expected profits will be, based on your historical accounting and external market indicators. The better your financial forecasting, the more capital you can ask for when endeavoring to scale your business.
- Allows you to guide your business in the right direction
Part of a thorough financial forecast includes external market and economic research. This level of detail allows you to steer your business in the direction of least resistance. If there are several business opportunities ahead, a financial forecast will help you to choose the most profitable and effective one for your business and/or industry.
- Take control of cashflow
Knowing what your future bank account looks like, can help you to budget and control it early. Take control of your cash flow by ensuring that all future financial obligations are covered, your shareholder reports are constantly up to date and you’re saving money in the most effective areas.
- Provides benchmarks for goal setting
Effective goal setting is paramount in the building of a business. If you have regular benchmarks to aim for, it can make the long term seem less monumental. Secondly, it can be easy to lose sight of benchmarks when you’re busy working in the business, rather than on it. By having clear and obvious benchmarks to hit at certain times of the year, the entire business can keep an eye on its direction and ensure that you’re making appropriate headway.
- Identifies potential shortfalls and risks
Whilst financial forecasting is no crystal ball, it does allow you to highlight and eliminate potential future risks. As a living document, your financial forecast should alert you to money-pits before you fall into them.
- Tells you what resources you need
If you know you need a cash injection or a new employee, but you don’t know how much you have to spend – a financial forecast will tell you. If a process or area of your business is draining more money than it produces – a financial forecast will tell you.
When it comes to finances, knowledge is power. Knowing your numbers puts you in the driving seat of your business. To get started, it is good practice to consider the regular, best, and worst-case scenarios of any financial situation – this way, you’re already starting to think analytically when it comes to numbers.
