Updated: Oct 10, 2022
Are you curious about financial forecasting for your business? A forecast is a fantastic tool that lets you look ahead at your business’s profit and cash, and other key financial indicators, which means you make more confident decisions.
It’s better than a budget because it projects 3 to 5 years out, and it’s updated every month to keep pace with the changing dynamics of your business. With a forecast you’ll always be able to see your expected profit and cash month to month and year to year. As well as other metrics like receivables and payables, and even equity.
So how do you know if your business is ready for a forecast? It will definitely take a bit of work, and you’ll need to decide if you want to build it yourself, or if you want to find experts to help. Either way, you want to be sure your business is armed with all the right tools to grow and thrive, so you should understand the benefits a forecast will bring.
Here are the 3 main signs your small business needs a financial forecast––and one reason it might not.
Your business needs a forecast if you are trying to make strategic decisions
Most small businesses start simply. You begin by selling what you know. You work hard, it goes well and pretty soon you have profit and cash, and you can actually do things with it to build your business better. But you have questions like, does it make sense to expand? Will a new sales line be profitable? If not, when will the break even point occur? And on and on.
Those are all “what-if” type questions, and the choices require strategy. It’s hard to be strategic when you don’t know what your future will bring.
A forecast will show your expected profit month over month and year over year, for up to 3 years. Even 5 if you build it right. And understanding your profit will let you understand your cash.
Your business needs a forecast if you have employees
It’s so exciting when you can hire your first employee, much less have an actual staff! You dreamed about this business for years and you weren’t sure if you would ever be at the place you could actually hire––and you have!
But now it often feels like pressure. Can you make payroll next month? In six months? You need to feel good about that because your staff are the lifeblood of your business.
A financial forecast will show your expected cash balances every month, and let you plan ahead for staffing expenses, so you’ll always be sure about payroll, or know well in advance if cash will be tight.
You need a forecast if you want to be more proactive
Most weeks (or sometimes most days!) you are hit with unexpected problems: equipment breaks, employees quit, your competition expands. You feel like you’re having to be reactive to every problem. It would be nice to be more proactive than reactive, but how?
A financial forecast will help you consider different possibilities for building your business, and get ahead of the unexpected. Should you spend cash for new equipment? Hire staff? Take a loan to play it safe? Can you begin selling that new line you’ve been considering?
The forecast will let you play with choices, both in terms of dollars and timing. It’s like having a matrix of choices, and you slide things back and forth, up and down, until you reach a profit and cash balance that works for your business. Then whatever sales and spending is needed to achieve that become goals you can manage.
A forecast won’t help you avoid every surprise, but it will help you be more proactive and put timing to things you know you want to do.
The 1 reason you don’t need a forecast for your business
So, why might you NOT need a forecast? It’s pretty hard to say no to a tool that will help you look ahead at your profit and cash, and be more strategic and proactive. But maybe you are concerned about how complicated it might be and are weighing the benefits.
So here goes. The only reason your business doesn’t need a forecast is if your income and expenses are entirely predictable, and you aren’t looking to grow. And while that seems unlikely for any business, it is possible.
Maybe you provide services on a multi-year contract, or your business is just you plus a few very loyal customers, and you aren’t looking to change things up. If this is the case, it’s actually the perfect time to think about strategy and how you might be able to build on it. Even if you start simply, with a sales-only forecast, it’s a great way to start looking “up and out” on your business, as opposed to “down and in.”
So there you have it - the top reasons your business needs a financial forecast.
If you are curious about forecasting and its benefits for your business and want to talk to a real person about it, please reach out to us at Lookahead. We are experts in financial forecasting for businesses big and small, and we’d love to hear about yours!