A financial forecast provides companies with a glimpse into potential futures. The more accurate the projections, the better you’re able to pre-plan and make decisions that really move the needle for your business.
A solid cash flow forecast:
- Gives you more confidence in your financials
- Highlights potential problems down the road
- Shows opportunities to improve processes and profitability
How do you create an accurate, usable, and powerful financial forecast? Here are five actionable steps.
1. Start with a Good Budget
How you spend money directly affects the ability to make it. A forecast predicts things like expected revenue and cash flow. By striving for an accurate budget as well as a solid forecast, you create a powerful decision-making asset.
What’s the number one reason for using a budget for forecasting? It allows you to better plan purchases (especially big ones). It’s not just what you’ll spend or how much you’ll make. But how to best use those funds to continue growth and meet your objectives as a company.
Key point: Forecasting, when paired with budgets, allows you to time big expenses well. (For example, bringing on more staff, equipment, etc..)
2. Include Non-financial Data Sets
Some business owners love their key performance indicator (KPI) reports. Tracking metrics to see exactly where the business stands is a great practice. And the better the data is going in, the more accurate the results.
Financial reports and forecasts are no different. In order to get an accurate prediction, you need good data. All previous sales, your budget, and other financial data are important to include. It’s also a good idea to make your forecasts a bit more comprehensive by including other non-financial data.
A few examples include:
- Number of leads: The number of leads you average per month/quarter.
- Close won/lost rate: How many of your leads say “yes” or “no” each period.
- Conversion rate: If you don’t have a direct sales conversion, this is how many visitors/leads convert into customers in your sales funnel.
Key point: Using these sales figures, you can create scenarios and set goals for your forecast. For instance, if a company increases its number of leads by 10% per quarter and maintains the same conversion rate—you can forecast a 10% increase in revenue per quarter (at least in that forecast scenario).
3. Incorporate Company Objectives
A powerful forecast is one you use to set objectives for the company. What’s your growth goal for the year? How many people do you expect to bring on? What’s on the roadmap for your products and services?
Once you know those goals, it’s time to choose the strategy to take to get there. Breaking down that strategy into metrics gives you the data to track in your forecast. Much like the example of increasing leads 10% and maintaining the conversion rate, it all comes down to tracking the right data.
Key point: Align your forecast with your objectives and really think about what it’ll take to achieve them. Then, match that strategy with data to track with the forecast so you’ll know exactly where you stand at any given point.
4. Use Multiple Scenarios
The ability to predict the future does nothing in and of itself. It’s what you do with that data, the plans you put in place, the decisions you make, and the results that matter. If you only forecast a 10% per quarter increase—what happens if an unforeseen economic downturn suddenly occurs?
A powerful forecast is one that includes multiple scenarios. Sure, you can’t plan for every contingency. That’s impossible.
That said, it’s not too difficult to plan for three:
- Positive: One where you meet, or very nearly meet, goals
- Same: Things stay the same over the next few quarters
- Negative: There are events in your industry, personally, or globally that hurt your business
Key point: Plan for contingencies with forecasts. Take those figures and think about how you’ll have to react. Then, set tentative plans in place. If the worst comes, you’ll mitigate loss and set yourself up for success, post downturn.
5. Make it a Rolling Forecast
Every point on this list alludes to the fact that you’re using the forecast as a regular asset to better run your business. For that, you need up-to-date numbers.
A rolling forecast is one that is updated and continuous in nature. It’s not a document created at the beginning of your fiscal year, but a living report that rolls over—becoming more accurate and useful over time.
Imagine having monthly or quarterly meetings knowing exactly how close you are to meeting your goals. Or seeing that a downturn is indeed having an impact and knowing instantly it’s time to put your contingency plan in place.
Key point: Use a rolling forecast to have near real-time data when you need it. You’ll be able to see exactly how the company is fairing and adjust to better meet goals or mitigate risk in the moment.
Partner with a Trusted Accounting Partner
Forecasting is a powerful asset in the business owner’s toolbag, when done properly. One of the best ways to ensure quality data and sound reporting is to partner with an accounting solution that understands small business.
At Adian, we offer services specifically to help small businesses get the most out of their financial reporting—including forecasts.
If you’d like to see exactly how our experts can help you, schedule a consultation today.