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...
Comptroller vs Controller Explained
The terms “controller” and “comptroller,” as well as the positions they define, may seem strikingly similar. Indeed, the word “comptroller” is believed to stem from a 15th Century misspelling of “controller.” However, despite the similarity in titles and functions,...
6 Signs You May Need a Financial System Upgrade
How often do you reevaluate your financial management system? For most organizations, the answer is not very often. After all, the ultimate point of a financial system is to put it in place, then rely on it and the people who contribute to it to help things run...
How to Choose an ERP System for Your Business
As companies grow and their operations become more complex, they tend to outgrow their existing software. Expanding business units or segments tend to become more independent over time. This makes interdepartmental communications and resource allocation more difficult...
Variable Costs, Fixed Costs, Total Costs: How Do They Differ?
Nearly every business has both fixed and variable costs. To ensure that your business remains fiscally solvent and profitable, it is important to understand the different types of costs and how to manage them. In general, variable costs relate to the number of items...
Debt vs. Equity Financing: Which to Choose?
Every business needs financing to fund growth. The old adage is true: it takes money to make money. There are two basic types of business financing: debt and equity. Each has its advantages and its drawbacks, and over time most businesses will need both. Finding the...
Strategies for Improving Vendor Contracts
For businesses that are inventory-supported, such as retail, resale, or manufacturing businesses, strategic vendor contracts can greatly enhance your profitability and cash flow. For some companies, vendor contracts are a set-it-and-forget-it portion of the business....
Basics of Business Banking
Every business needs banking services so they can receive funds, pay bills, and finance large purchases. It may be tempting to just use your personal bank for your business needs. However, a business has much greater need to understand and carefully select its banking...
How to Determine Cost of Goods Sold (COGS)
What is Cost of Goods Sold (COGS)? Cost of Goods Sold is also known as COGS or Cost of Sales. It is a critical financial metric that indicates the direct cost of creating or acquiring the goods a company sells during a given time period. This figure helps companies...
7 Most Common Financial Mistakes Construction Companies Make
Strategic CFO, Bradford Pack, discusses the 7 most common financial challenges faced by construction companies. With long project times, sizable material orders, and upfront labor costs, the construction industry often faces a variety of financial challenges. Below...
Evaluating Your Company’s Financial Confidence
An axiom in business is that CEOs and founders must “know what they don’t know.” It’s rare that a CEO or founder has expertise in all arms of the business. Instead, they must rely on identifying their weaknesses and make strategic adjustments—usually by hiring someone...
How Does a CFO Add Value?
CFOs are high-level, strategic experts who optimize financial resources in a company while using those resources to achieve company goals more efficiently and effectively. Unlike bookkeepers, controllers, and accountants whose primary functions are rear-facing,...
5 Hiring Tips from a CFO That Will Save You Time & Money
When is the best time to make a new hire? Hiring too late can mean work (and clients) falling through the cracks; hiring too early can mean unnecessarily increasing your expenses. Payroll is one of the largest expenses a company will face, which makes the decision to...
