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.”
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
Jerry Vance is the founder and managing partner of Preferred CFO. With over 16 years of experience providing CFO consulting services to over 300 organizations, and 30 years in the financial industry, Jerry is one of the most experienced outsourced CFOs in the United States.
You may also be interested in...
The wise business owner will “know what they don’t know,” and will seek the appropriate experts such as financial advisors to fill those gaps.
If Your Company Doesn't Have a Financial Forecast, You're Wasting Time and Money Every company has goals. Where do you want your organization to be 5 years from now? 10 years? Most even have a general idea of the benchmarks you need to hit to get there—"By increasing...
Whether implementing a new software system, adding office space, acquiring another company, or any other substantial investment, companies want to know how long it will take to recoup the money they spend on major purchases. The way to determine this is by calculating...
Finding funding for your business is a process that takes a lot of time and effort, especially during the startup phase. Many entrepreneurs fail in their first attempts at fundraising because they are poorly prepared. Others get themselves into trouble by choosing the...
In these days of economic challenges and changes, many companies struggle with uncertainty about the future, seeking tools and resources to best position their businesses for financial success. Often it can be beneficial to bring in a financial advisor who has...
What is a Cap Table? Capitalization tables, commonly called “cap tables,” are highly useful spreadsheets maintained by companies that have multiple owners or investors. Cap tables are especially important for private companies at startup and in the early stages of the...
Many companies experience times when they find their accounting departments short on staff or short on expertise. Sometimes emergencies and financial needs arise that are beyond the capability of their financial personnel to address. This is particularly true in times...
A Profit and Loss (P&L) Report, also called a Profit and Loss Statement, is a key financial document that details a company’s income and expenses over a specific period of time. This time period is typically a month, a quarter or a year. Depending on company needs...
When a business sale, acquisition, or major investment is contemplated, one important step in the due diligence process is the generation of a Quality of Earnings report, sometimes abbreviated as QOE. Even though a company may have strong financial statements, those...
There are two methods of accounting: cash and accrual. In cash accounting, transactions are recorded when payment occurs. In the accrual method, revenues and expenses are matched and recorded at the time the good is delivered or the service is performed, regardless of...
Choosing the right supplier for your business can be complicated, especially if a large portion of your product comes from a single company. For many companies, supplies are secondary only to labor in their expenses. But choosing the right supplier has even more...
In every company, there are important decisions to be made on a daily basis. Some decisions are mundane and have only short-term consequences. Others are strategic and can affect the company’s performance and profits for years. Too often, these critical decisions are...