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Building a business? Get a financial forecast instead of a budget

Updated: Oct 10, 2022

Your business—your dream—is up and running!


The word is out. You have customers. Your products and services are special, and they are meeting the needs of your customer base. Congratulations!


Maybe you have an accountant by now, or maybe you are doing your own accounting using either Quickbooks or Xero (both good choices).


Accounting is important to stay compliant and to know how your business performed in key financial metrics, like revenue, profit, cash, and earnings. You'll want to be sure to stay on top of your accounting and get monthly reports from your bookkeeper.


You might also have a budget, and that can be useful for planning your expense needs based on your predicted sales, and for setting spending limits.


But what about the critical decisions you need to make for building your business? How are you making those? Decisions like:

  • How much should I spend on marketing?

  • Should I hire staff or outsource?

  • When can I afford new equipment?

  • Do I need a loan, or will my profits generate enough cash?

  • What is my expected cash next quarter?

Even with the best accounting, you still only know how you did in the past. It's impossible to know about your future using accounting data.


Even if you have a budget, you still can't look ahead with clarity at your future profit and cash. Budgets aren't dynamic - they don't change month over month based on your performance. They are set once, and so after 3 to 4 months, your budget is off track and no longer helpful.


But there is a way to look ahead at your future profit and cash, and other key numbers like sales, gross profit, and expense needs. And you can look ahead as far as 3 years out! And then use this information to make critical decisions for your business.


You can also use your forecast with key stakeholders like investors or boards, who want to know more than anything else how your business will do in the next one to three years.


So what is this magic bullet for more confident decisions? It's called a financial forecast.



What is a financial forecast?

A financial forecast is a collection of future-looking financial metrics like revenue, profit, cash, and even equity. It is made up of your business’s unique rules, plus certain educated guesses, along with special calculations. All the numbers you need to understand your business and manage it better are included in a full financial forecast, which can be calculated for up to 3 or even 5 years. These are called projections, and with them, you can make much better decisions in running your business.


Financial forecasting is a very common practice among large corporations and public companies. They have teams of employees who do nothing but forecast all day every day. (I was one of those employees for many years in my career.) But forecasting isn’t as well known by small business owners. Your expertise is your specialized trade - it isn’t necessarily running financials.


Even so, it’s critically important that you can look ahead at your profit and cash, and other key financial metrics, because that knowledge will help you make smart, confident decisions for your business.


Let’s examine the 5 top benefits of a financial forecast for your small business.



The top 5 benefits of a financial forecast for your business


1. A forecast lets you look ahead on profit and cash

This is the primary benefit of forecasting. You can see into the future of your business's profitability and cash balance, which is a game changer in managing your business better.



2. A forecast allows you to track your progress

A forecast is a living tool. It’s reviewed regularly and updated with actual results, so your future-looking numbers are always adjusting as time passes. This means you can stay sharp on opportunities and possible problems to solve. Maybe last month you wanted to purchase new equipment, but a change in your business is causing a downturn in cash. The problem will be at its worst 6 months from now, but you have no way to know it with your current reporting. Wouldn’t it be nice to know this information NOW?! And work on solutions to correct it, so that you can purchase the equipment you need.



3. A forecast is what all lenders and investors want to see


Once it’s built and you’re using it, you’ve got the most important thing that any lender will want to see, should you ever need financing. And since you’ll be using it to track your performance, your lender will be even more confident in the numbers, and impressed with your attention to detail - so will your board or investor if you have one.



4. A forecast helps you make confident decisions


The kind of decisions that keep you up at night right now are decisions that a forecast will solve.


Is it time to hire additional staff? Time to purchase capital equipment to open that new line of products? Can you open a new location? All of these questions are not only answered in the forecast - they are dictated by it. No spending decision should ever be a question - it should be known and driven by your forecast.


It might sound too good to be true, but it’s possible. And the work of it is fun once you get going!


5. A forecast makes you a smarter business owner and manager


There's a reason the big companies do forecasting regularly. They know they need it to make the best decisions. And they need it for reporting to their boards or investors. In a nutshell, it makes them smarter.


The big companies use sophisticated software and have entire staffs dedicated to forecasting. But your small business doesn't need all of that. You can do just the right amount of forecasting to get the results you need. There are special software applications that will help you, and services you can engage to either teach you this skill or do it for you.


Either way, you should make forecasting a priority and get yours going right away.


If you want help with budgeting, forecasting, or even business strategy, check out Lookahead. We are experts, and we'd love to hear about your business.



 


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