How will forecasting help my business succeed?

Joe Collins, CPA, CA / 3 min read
Forecasting is a way to see into your business’ future. Well, not exactly, but it’s as close as we can get to that. It’s really a means of predicting changes in your business - be that sales, profits, expenditures, and more - and developing strategies based on these predictions. Thoughtful forecasting can help ensure that your business is set up to succeed.

Start with a financial model

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:

  • Lead generation
  • Asset investment
  • Raising capital
  • Hiring

And more!

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.

Know what makes for successful Forecasting

The key to a successful financial model is three-fold:

  1. Keep it simple - You’ll be tempted to make things complex because, naturally, your business is complex. But this will only prevent you from keeping up with your model and you’ll lose out on lots of its benefits.
  2. Set a schedule - Not only will you set a schedule for when you want to achieve your goals, but you can also set a schedule for reviewing your financial model. We recommend starting with a monthly review, and you can increase the frequency as you get into a rhythm.
  3. Have accountability - whether it’s people in your direct team or an outsourced accountancy firm, (hey, like us!) having a support system to keep you accountable helps remove some of the burden from your shoulders. Remember, you’re not in this alone.
  4. For three more keys on successful Forecasting, you can download our free ‘Financial Foundations’ pdf guide here.

Compare your forecast to your actuals

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:

  1. Did you hit your targets? Why or why not?
  2. Did you overspend in some areas? Why?
  3. Did your spending priorities change through the period?

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!

Article by Joe Collins, CPA, CA.Originally published August 3, 2021.

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