What are the benefits of financial forecasting for your company?

Financial forecasting strengthens the livelihood of startups. 4 out of 5 small businesses die due to cash flow problems. Financial forecasting empowers smarter decisions around fundraising, hiring, and growth. From my experience, business plans often prove overly optimistic, leaving little room for the harsh reality that can unfold. It's always wise to build in a cushion for unforeseen expenses, be it capital or operational.

Financial forecasting enhances decision making. For example, it helps in assessing the financial viability of expanding to a new location, ensuring resources are used wisely and aligning with financial goals.

Great performance comes from great decisions and great decisions come from great analysis and understanding. Financial forecasting invests significant effort and resources to crafting a set if financial performance metrics driven from forecast financial statements derived from key performance drivers of the business. Going through the process, decision makers ideally would go through a robust cycle of asking what, how, so what, what if and now what to simulate future scenarios. While in a VUCA world the variance can be significant, the learning and understanding better prepared leaders and decision makers to structure better processes and robust control systems to weather the uncertainties of the future.

Story-Telling: Use forecasts to tell a story of what might happen with different choices. Choice Maps: Use decision trees to show how different choices lead to different financial outcomes. Live Playbooks: Keep forecasts updated in real-time for quick decisions when things change. Test Strategies: Run simulations based on forecasts to see how different strategies might work out. Feel the Market: Blend in market feelings with hard numbers for a fuller picture. Mix Insights: Combine financial forecasts with insights from other areas like market trends. Clear Choices: Make algorithms that explain why one choice might be better, based on forecasts.

Management will be aware of the future expense and can align the fund requirements accordingly. The stakeholders responsible for the budget will have visibility on the spend and can plan thier day to day actions systematically and in a controlled manner.

Game Plan: Like a coach devising a game plan, use financial forecasting to outline your strategy to win in the market. Flexible Goals: If a play isn’t working, the coach adjusts. Similarly, tweak your goals based on real-time market feedback. Market Playbook: Before playing, a team studies the opponent. Similarly, analyze market conditions to refine your strategy. Investment Draft: Like drafting star players, decide where to invest to boost your market position. Team Huddle: Share forecasts with all departments to ensure everyone’s playing towards the same goal. Align your strategy using forecasting, like a coach leads a team to victory.

Aligning your strategy and goals is essential in your profession. It means ensuring that financial forecasts support your company's broader objectives. This alignment enables you to make financial decisions that are in harmony with the company's strategic direction, promoting financial stability and growth.

Without any financial planning and return of investment view of the strategy, the company will not have the clear path to achieve targets

The forecasting process requires finance teams to work closely with business units to understand upcoming initiatives and translate strategic plans into financial estimates. This facilitates alignment between high-level company objectives and departmental budgets and activities. Financial forecasts keep everyone on the same page regarding performance targets and help identify where strategic adjustments may be needed.

This is especially helpful for dealing with your investors. Investors value a company according to a model that takes the net present value of the expected stream of future cash flows the business will generate. The more accurate your predictions, and the more clearly you communicate those to your investors, the more accurately they will be able to value your business. This is relevant to both private and public companies. For private companies, if they’re ultimately going to raise money, they want to get maximum value for the shares they sell. Having a proper forecast facilitates this. For public companies, the stock price will reflect the company’s forward-looking projections.

Financial forecasting serves as a compass, directing an organization's journey toward its financial objectives. By projecting future revenues, expenses, and cash flows, companies can anticipate potential challenges and seize emerging opportunities. These forecasts, when compared with actual financial results, provide invaluable insights into deviations, enabling timely course corrections. Regularly updating forecasts ensures the organization remains agile, adapting to market shifts. This ongoing process of setting targets, monitoring real-time performance, and adjusting strategies based on forecast-to-actual analysis fosters an environment of continuous improvement, enhancing both operational efficiency and financial robustness.

It also shows how much the leadership team know about their business, their customers and the market they operate in. Constantly and significantly overachieving or underachieving shows the forecast was a guesswork rather than based on real business knowledge.

What you dont measure, you cant improve either. Good financial monitoring will be focus on results and cashflow, that drives all the growth and the strategy planning for the company growth.

Forecasting and planning are used quite interchangeably And one clear adage to remember is this "Failing to Plan is same as Planning to Fail" So always plan for penny as well as pound, plan for all incomes and expenses as much as possible, plan for fixed and current assets and plan for depreciation as well as depreciation sinking fund too You always have opportunity to adjust the plan, but if you don't have a plan in the first place, you will left to lurch..

Regular financial forecasts allow organizations to track actual results against projections to monitor performance. Variances can be analyzed to understand their root causes. This empowers managers to course correct by taking actions to address underperformance or capitalize on positive trends. Ongoing forecasting provides a feedback loop for continuous monitoring and control.

Effective communication and collaboration with stakeholders are key aspects of your role. For instance, when presenting financial forecasts to company executives, clear and concise communication helps them understand the financial outlook. Collaboration with department heads can lead to better budget planning and resource allocation, ensuring everyone works toward common financial goals.

Sharing financial forecasts enables transparency into the company's outlook. This facilitates collaboration across business units, allowing leaders to coordinate plans and resources. Forecast presentations also provide opportunities for productive discussions between finance and operating teams. The insights gained can strengthen forecasting models and organizational alignment over time.

Forecasting financial risks and oppurtunities at project level helps in setting appropriate quarterly targets for revenue and margin . It also helps in addressing the risk areas which helps in future growth .

Scenarios within financial forecasts can help companies better evaluate and prepare for upside opportunities and downside risks. Exploring potential impacts makes it possible to proactively develop mitigation strategies for risks or plans to seize opportunities. Built-in contingency planning through forecasting enables businesses to be more agile in responding to changing conditions.

By analyzing future financial trends, companies can identify potential challenges such as economic downturns or market fluctuations. This foresight allows for the development of robust risk mitigation strategies, ensuring resilience in the face of uncertainties.

This is a key point. In order to derive the maximum benefit from financial forecasting, however, you need a robust system and culture of data analysis and management. This means finding or deriving data and metrics that are leading, as opposed to lagging, and feeding them into your analytics model to get forecasts in real-time.

Remember to regularly compare your forecast with the actual data, as the forecast will serve for all that was mentioned above ONLY if it's accurate enough. Aim for +/- 5% deviation!

For my company, I use financial forecasting to tell a story - of How we’ve done in the past, how we are performing in the present and if we will meet our future goals .

Financial Forecasting is one tool in your toolbox. It is a very important tool to be sure. Just make sure you use it appropriately and in the right contexts and situations.