Forecasting is an important but often overlooked tool for successful business operations. Although they frequently require an estimation of the income an organisation will bring in, forecasts can provide an important overview of the expected cashflow and balance sheet that can aid with planning and risk management. Here, we look at the different reasons why financial planning is an essential part of business.
It’s true that it’s near impossible for many businesses, particularly start-ups, to forecast for an entire year, but quarterly forecasting helps senior staff to determine how cash flow can be managed for the foreseeable future. It helps to eliminate the calculable risk of finding yourselves short of adequate cash to pay employees and suppliers.
If done at the beginning of each quarter, management can get an idea (albeit rough) of the money they’re required to bring in. Of course, unexpected downturns may occur, but with adequate planning and forecasting, your finances may suffer less than if you hadn’t gone through this process.
Support of management decisions
A little financial planning can go a long way towards making sound management decisions over the quarter. By having an estimate of the cash flow, senior managers can make more informed decisions when it comes to hiring staff, developing new products or planning for future growth. Your first set of forecasts may prove to be wildly inaccurate, but as the year progresses, you should be able to forecast with a little more accuracy. At this point, forecasts can be extremely useful when taking bigger decisions.
Another reason to spend time forecasting is that it brings senior management together to discuss finances and collaborate on common goals. With a basic awareness of what to expect each quarter to bring, department heads can both review their budgets and use the business’ financial goals to set targets for their individual teams. It’s also a good opportunity to encourage staff to work together and share resources if things aren’t going as well as expected.
If the time has come to expand your business, a good forecast model can help identify whether a new venture is worth undertaking. It will help determine how the organisation can be funded, showing the potential impact on working capital. If equity funding is necessary, it is also a key part of satisfying investors that their funds are safe and they will achieve a good return.
Start your business forecasting
Although the process of forecasting may seem meaningless, it can provide a lot of value to your business. If you’re undertaking the task for the first time, or want to ensure a more accurate model, seek help from a financial advisor who can work with you to produce as precise a forecast as possible. Before long, you’ll wonder why you ever went without them!