At Preferred CFO, our tagline is “The Confidence of Knowing.” This stems from our philosophy that the more information an entrepreneur has about his or her business (past, present, and future), the better they can make business decisions that optimize their resources and maximize profitability.
As an entrepreneur, every business decision is made based on an assumption of something that may or may not happen in the future. A forecast takes the guesswork out of these decisions, providing projections derived by business, industry, and economic data to provide a clearer course of action for the business.
Not only does a forecast help maximize the use of current resources, but it also helps strategically plan operations well into the future to optimize profitability and growth.
What is a financial forecast?
A financial forecast is a document that estimates and plans for future business outcomes. This document, usually a spreadsheet, contains detailed projections for income, expenses, and major operational decisions over a period of time. A financial forecast helps to maximize resources, minimize waste, and optimize growth and success.
A forecast goes far beyond just budgeting existing funds or projected funds. It provides a blueprint or detailed guide for when to take certain actions to maximize your existing and future resources to minimize waste and optimize sustainable growth.
A financial forecast can help estimate:
- How much income your company will receive and when
- Expenses, including labor costs, materials, property and equipment expenditures, sales and marketing, research and development, and more
- Cash flow at any given time
- When to hire new employees (and at what salaries)
- Which products to promote and when
- When to increase/decrease prices
- How to formulate sales strategies
- How much inventory to hold and when
- When to raise capital, how much, and in what mix
- Depreciation prediction & when to plan for big purchases
- Best time to add new products or services & how to support them
- Best time to expand geographies & how to support that growth
Why is Financial Forecasting Important?
At Preferred CFO, we are often shocked to discover how many businesses aren’t utilizing a current financial forecast. When we ask entrepreneurs, they say it’s either because generating a financial forecast is too time-consuming or they don’t have the data to complete it, because they don’t see the need for a financial forecast, or because they just don’t have the time to dive into the numbers.
We believe that financial forecasting isn’t optional—it’s essentialfor optimizing the growth and performance of your company. In a study by the Institute of Business Forecasting, researchers found that just a 1% improvement in forecasting accuracy could save on average $1.43-3.52 million a year in large businesses.
For more information about the importance of a financial forecast, read our article “3 Reasons You Need a Financial Forecast.”
Talk to an Outsourced CFO Today
Call or send us a message today to speak with one of our expert outsourced CFOs
How Often Should You Revise Your Financial Forecast?
Financial forecasting doesn’t predict the future, but it does help create an educated estimation for it. By revising your financial forecast at least once a year to reflect actual performance and trends, you can maximize the accuracy of your forecast.
As we saw in the above study, accuracy of a financial forecast helps minimize waste and optimize operational and financial efficiency in a company. We like to think of forecasting as a roadmap—if you looked at the roadmap only once before your journey, your path may be thrown off by unexpected pit-stops, road-blocks, or new opportunities. It’s also nearly impossible to follow directions turn-by-turn when you’ve only seen them once.
However, with regular review of your “roadmap,” you can eliminate wandering, better plan for contingencies, and get where you want to go faster.
Entrepreneurs should look at their financial forecasts at least once a year, but preferably at least every quarter. Financial forecasts should be looked at in conjunction with budgets and operational planning such as sales and marketing or R&D.
How to Get Started
Financial forecasts are only as good as their data and projections, which is why many entrepreneurs turn to their in-house CFO or an outsourced CFO to design and implement financial forecasts. These forecasts are seen as an investment in the company, not an expenditure, as the data from the financial forecast in almost all cases helps optimize cash flow and minimize waste almost immediately and increases profitability and growth in the long-run.
It’s important to note that CPAs, bookkeepers, and accountants are not typically equipped to provide an accurate financial forecast. CPAs are tax experts and can provide long-term tax strategy that can provide significant benefit to an organization, and bookkeepers and accountants are experts in maintaining day-to-day reporting and cash management. However, a CFO typically has industry knowledge and expertise, forecasting, and operational strategy experience that makes them uniquely qualified to facilitate accurate financial forecasting.
However, not all entrepreneurs are in a position to hire an outsourced CFO to help with financial strategy. If you’re planning on taking on financial forecasting yourself, we recommend this great guide by Jumpstart Inc.
Talk to a Financial Forecasting Expert
Our CFOs are happy to talk with you to answer any questions you may have about financial forecasting or to help you create your financial forecast. Please feel free to contact us today.
About the Author
Tom Barrett is a skilled CFO with extensive experience. His financial expertise is key to helping companies with strategic financial planning, data analysis, risk assessment, budgeting, forecasting, cash flow management, and much more.
You may also be interested in...
Convertible Notes Part One: The Basics
Most burgeoning entrepreneurs, and even casual Shark Tank viewers, will likely understand the process of taking investment capital, but the actual process is a little more complicated than a five-minute TV show segment might reveal. A less publicized but no less...
Startup Tips: The Shared Working Space Debate
Entrepreneurs, especially those bootstrapping their own business and trying to squeeze 11 cents out of every dime, know the struggle of choosing how to best spend their company money. Sometimes, when every penny counts, some entrepreneurs choose to work from home;...
Using Tech to Handle Small Business Payments
Technology solutions can streamline your business processes tremendously. From billing solutions to bill-paying solutions, choosing the right tech is critical for several reasons. You don’t want to just go for the lowest bidder. Although it’s important to keep costs...
Scalable Business Model or Bust.
The Importance of a Scalable Business Model Going from idea to product to company is one of the biggest challenges to an entrepreneur. Many businesses start with a great idea but are soon gobbled up by competition or lack of financing. Business models should be built...
Managing Labor Expenses to Maximize Profit
The current minimum wage in Utah as of Jan. 1 2014 is $7.25, which is equal to the Federal level. Several other states have higher minimum wages, but Utah’s lower cost of living compensates for the difference. Whether you pay your employees $7.25/hr, $50/hr., or...
Equity Series, 3: Stock Options from Employees’ Perspective
As a means of attracting top talent, management will often grant stock options as additional compensation. It is also a great way to align the interests of management with employees. As everyone works together to improve the company, the value of the stock price...
17 CEO’s: Top 3 Daily Habits for Success
Daily Habits for Success Jim Citrin of Yahoo Finance compiled research on 17 highly successful CEO’s to study their daily habits in an effort to pinpoint which ones lead to success. After gathering his findings, he wrote about the three most important ones. Start...
How to Understand Your Company’s Revenue Drivers
It could be argued that revenue is the single most important aspect of your business. Many asset managers and analysts of all kinds spend most of their time modeling out revenue drivers, which illustrates how important it is for management to understand them. And...
Equity Series, 2: Stock Options from the Employer Perspective
Hopefully you’ve read the first blog of this series about stock options. This article will address stock options from an employer’s perspective. Benefits of Using Stock Options The biggest reason companies use stock options is to incentivize their key employees. Stock...
Stock Compensation Series 1: Valuing Stock through a 409A Valuation
I’ve decided to write a mini, 3 blog series on stock options and stock-based compensation. From my experience in Utah as an outsourced CFO,I have observed a degree of confusion on this topic. I hope to shed some light on options from both the perspective of...
Mad Business Lessons to Learn in March
From competition to leadership, many lessons can be learned from participating in sports. March Madness is a particularly unique time where teams are pushed to their limits with stakes get higher and higher. Coaches spend hours reviewing film and strategizing new and...
3 Ways to Recognize & Utilize Internal Synergies
Recognizing synergies can make a remarkable difference for your business. The idea behind synergy is that one plus one no longer equals two, but now equals three or more. You’ll also hear the economic term “economies of scale,” which happens when potential output...
