At Avalon, we’ve never had a budget. Instead, when we first started we built a financial model that has grown and developed with us. This allowed us to set targeted goals around revenue growth, expenses, and maintaining profitability.
A financial model is one of the tools you can use to forecast for your business. But what exactly is it? Put simply, it’s a spreadsheet that uses various pieces of data - like your income statement, balance sheet, and cash flow statement - to forecast your business’ future financial performance. It can help you make decisions and goals around:
For example, by designing a financial model you might see that you need 10 new customers in the next quarter to hit your profit goals. You’re also aware that you generally close about 25% of leads. With this information, you can set a goal of generating 40 new leads in the next quarter.
The key to a successful financial model is three-fold:
Forecasting is not the equivalent of looking into a crystal ball. At the end of a month, a quarter, or a year, there will be discrepancies in the numbers you forecasted and the actual numbers of your business. Don’t panic! An important step in forecasting is reflection. Ask yourself:
With these questions answered, you can then update your forecast and, ideally, increase its accuracy. For example, if you didn’t hit your previous targets, or overspent in certain areas, how will this affect the coming months? How have your targets changed? Most importantly, what actionable steps will you take to achieve these new targets?
Setting the foundation for forecasting is the hardest part. Once you have a system up and running (and someone keeping you accountable) you gain momentum and it becomes easy. For more guidance on forecasting for your business plus four more tips on creating a successful, profitable, and valuable business, download our free Financial Foundations pdf here!