I’ve written about business planning and how failing to plan is planning to fail. This week I want to write about a very important element of business planning… the Financial Forecast.
Small business and entrepreneurs are traditionally less likely to use forecasters and prepare these important tools. In my experience, that’s because small business can be run by entrepreneurs who work on their instincts.
But as most of us know, business isn’t all about gut-feelings.
I’d like to see more small business begin to use professional forecasting because quite simply, it’s an integral part of your business plan and one of the many tools I rely upon to help my clients become financially independent.
So what is it?
A financial forecast is an estimate of your future financial outcomes for your business. The key word here is estimate. It’s not something that is set in stone and at the end of the day it’s a moveable feast. Having a detailed financial forecast can help with lots of things from informed decision-making to getting a much-needed bank loan.
At the very least, it proves that you have faith in yourself
At the end of the day you are an investor in your own business and you must have confidence in the validity of your business concept.
Use a financial forecast to prove to yourself that your business will generate your desired profit and when it will start to make that profit.
Review, revise and revisit
A financial forecast is a vital tool in the financial management of your business and, like your business plan, requires regular review and amendment to be effective. Once the period for which you prepared the budget is over, be sure to compare the actual results against your budget forecasts. Examine why variations have occurred, take any remedial action necessary to correct the problem, or plan for them accordingly in your next budget.
Advantages of an effective financial forecast:
- Demonstrates the financial viability of a new business venture.
- Allow you to construct a model of how your business might perform financially if certain strategies, events and plans are carried out.
- Allow you to measure the actual financial operation of the business against the forecast financial plan and make adjustments where necessary.
- Allows you to guide your business in the right direction and take control of your cash flow. Provides a benchmark against which to measure future performance.
- Identifies potential risks and cash shortfalls to keep the business out of financial trouble.
- Provides an estimate of future cash needs and whether additional private equity or borrowing is necessary.
- Assists you to secure a bank loan or other funding. Lenders and investors require financial forecasts to show your capacity to repay the loan.