Financial Forecasting 101: A Complete Guide

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

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...