1 (801) 804-5800 info@preferredcfo.com
Facebooktwitterpinterestlinkedinmail

If your company is preparing to raise capital or if you are currently writing a business plan, you may be getting ready to build your 5-year financial forecast. It can be intimidating to plan this far into the future—as well as knowing what kind of projections to make.

However, when used properly, a five-year financial forecast can become a great asset to your business, not only to raise money, but to help you understand and build your business.

Many businesses build a 3- or 5-year forecast when they first write their business plan, but few look at this forecast again after its written. A 5-year forecast is an essential tool not only for new businesses but for growing businesses of all sizes as well.

In this article, we discuss what a 5-year forecast is, why a financial forecast is important, and whether your company needs a financial forecast.

What is a 5 Year Forecast?

A 5-year forecast is an educated projection of your company’s financial performance over the next five years. It specifically details projected revenues, costs, expenses, cash flows (including any projected capital raises), and owner equity, as well as projecting sales growth and margins.

A 5-year forecast is much different from typical accounting and historical financials. Accounting reports past financial performance while a five-year financial forecast predicts future financial performance.

This 5-year forecast is an important document for potential investors who want to see how capital will be used to grow the company and lenders who are analyzing loan risk—but it is also an essential document for management to understand your business and plan for successful growth. A five-year forecast can help educate business decisions (such as hiring, R&D, marketing, capital raises, and more), making it a key tool in strategically growing your business.

Why is a Financial Forecast Important?

A financial forecast is important because it takes the guesswork out of your company’s growth. A well-written financial forecast uses your company’s historical performance, existing assets, market demographics, and industry trends for realistic projections. This means your financial forecast isn’t just a performance meant to impress investors; it is a realistic blueprint for optimal business growth.

  • Informs financial decisions. Financial decisions that are made based on a financial forecast are more informed since you have projections for how a given expense will impact the company down the line. This means you have a better basis of judgment to say “yes” or “no” to potential purchases, hires, or shifts of focus in sales or R&D.
  • Reduces wasted spend. A financial forecast helps reduce wasted spend since it helps you conscientiously ensure your expenses are driving company growth.
  • Helps identify issues. A well-written and well-researched financial forecast becomes a baseline for your business performance. If numbers aren’t hitting your projections, it can be an early indicator of a potential threat or issue, allowing you to more quickly respond and recover.
  • Informs hiring decisions. A financial forecast can also help you make important hiring decisions. It will give you a better look at metrics such as customer lifetime value (and whether an additional service rep could reduce customer churn), sales volume (and how much an added sales rep could contribute to revenues),
  • Keep a better eye on vendor contracts. Sometimes expenses with vendors can rise without the company taking notice. A financial forecast helps keep track of these relationships and more quickly spot inconsistencies or opportunities for improvement.
  • Improves cash flow. More than any other benefit, a financial forecast will help improve cash flow. This is because you can more strategically align expenses with income while reducing wasted spend to ensure your cash reserves never fall too low.

Who Needs a Five-Year Forecast?

Many companies are under the impression a forecast is only necessary when you’re raising capital or if you are writing an initial business plan. However, businesses of all sizes and stages of growth can benefit from a five-year forecast. Not only can a five-year forecast help improve your cash flow and reduce waste, but it also increases your ability to achieve your goals more quickly.

Think of a five-year forecast as a map or blueprint. It guides your company from where you are now to where you want to go. This guide helps to reduce mistakes and streamline your path for improved success.

A five-year forecast should not be written and then stashed away in a filing cabinet; it should become a living document that is revisited monthly or quarterly. At Preferred CFO, the five-year forecasts we create for our clients are updated monthly and become a rolling monthly forecast as well, to give you the most accurate view into the future and to help you grow your business with confidence.

How Can We Help?

Would you like more information about financial forecasting, or would you like to work with one of our outsourced CFOs to design a financial forecast for your company? Reach out, and one of our CFOs will be happy to answer any questions you may have.

 

About the author

Jerry Vance is the founder and managing partner of Preferred CFO. With over 15 years of experience providing CFO consulting services to over 300 organizations, and 28 years in the financial industry, Jerry is one of the most experienced outsourced CFOs in the United States.

You may also be interested in…

How Can a Fractional CFO Help You Save Money?

How Can a Fractional CFO Help You Save Money?

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 Capitalization Table and Why Does it Matter?

What is a Capitalization Table and Why Does it Matter?

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 enterprise. They...

Top Benefits of Financial Staff Augmentation

Top Benefits of Financial Staff Augmentation

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...

Qualities of an Effective Profit & Loss Report

Qualities of an Effective Profit & Loss Report

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...

What Is a Quality of Earnings Report?

What Is a Quality of Earnings Report?

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...

What Is the Purpose of Accrual Accounting?

What Is the Purpose of Accrual Accounting?

What Is the Purpose of Accrual Accounting? 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...

3 Things to Know Before Choosing a Supplier

3 Things to Know Before Choosing a Supplier

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...

How Does a CFO Influence Strategic Decisions?

How Does a CFO Influence Strategic Decisions?

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...

CFO Hiring Guide: Analyze Your Needs & Maximize Value

CFO Hiring Guide: Analyze Your Needs & Maximize Value

Whether your business is a startup or an established enterprise, you need a strong, agile financial team with a highly competent leader. Some companies think they can get by without a Chief Financial Officer (CFO) until they start preparing to go public. Other...

Financial Expert Roles & Responsibilities

Financial Expert Roles & Responsibilities

It’s not uncommon to have difficulty differentiating between the main financial professionals. Not only are the names similar, but they are also often unintentionally used interchangeably. However, despite how the titles may be used colloquially, there are distinct...

Choosing the Right Vendors for Your Business

Choosing the Right Vendors for Your Business

Nearly every business requires supplies and services. To keep your company moving forward smoothly and to ensure optimum profitability, you need to find vendors who are trustworthy, consistent, and correctly priced. An ideal vendor is more than just a supplier; they...

How Much Does a Virtual CFO Cost

How Much Does a Virtual CFO Cost

A virtual CFO, also called a VCFO or fractional CFO, is a consultant or company that provides CFO services to one or more businesses on a part-time or ad-hoc basis. In the past, a true CFO was usually a highly paid, full-time employee that only large corporations...

Facebooktwitterpinterestlinkedinmail