Grow your business and your bottom line
Every business is in constant search of improvement. Anything that can provide an advantage or growth opportunity means less stress for leadership and an improved the bottom line. But many C-suite leaders will focus primarily on marketing and sales opportunities for growth. This makes sense and is certainly not a waste of time.
However, building out a simple financial forecast can be the building block to helping your business grow even more. A financial forecast is a forward-looking financial projection allowing you to create and plan your company’s future.
Every leader worth their weight knows they should be using a forecast, but many don’t do because they don’t have the resources available, don’t have the team to execute, or just can’t get to it with everything else they have on their plate. However, a financial forecast can can be a massive competitive advantage.
A financial forecast forces you to be intentional
The repeated monthly, quarterly and annual cycle of a business can be so consistent that you can fall into a trap of moving with no clear forward-looking direction. Though you’ll likely have a revenue goal, it’s important to ask yourself if your business is simply taking action just to do it, or if there is a concrete plan in place for the future.
A financial forecast is a great tool that provides clarity about where the business currently stands and where it is going. We recommend creating a one-year financial forecast where you extrapolate where the business is currently heading and where it would be if everything continued as-is.
Visually seeing your direction also allows you to make plans. You can also decide if where you are heading is truly where you want to go. If it’s not, you can make adjustments and determine what decisions to make and what investments may need to change.
The key here is that a forecast will enable you to have a real conversation about what your goals are and how you can achieve them. This is a massive advantage in and of itself, because being intentional will make you purposeful and more likely to get the results you are going for.
A forecast will help you make faster adjustments
In life, the way we get what we want is to start down a path and continually make adjustments as we run into challenges and roadblocks. Businesses are the same, no matter how large they are.
In your forecast, you’ll set a target and then start taking action to reach that target. Inevitably, things will not go as planned. You will miss targets and find certain assumptions were completely off base. However, this can be a positive thing. It’s better to catch these issues quickly, because then you can make appropriate adjustments when needed.
A company that is constantly adjusting and iterating to hit their target will be much further ahead than one that moves forward by simply looking backward at results.The goal of a forecast is not to create a perfect projection, but to give a tool for accountability to ensure progress is being made, even when things change.
A forecast provides clarity with key performance indicators
No matter how advanced or complicated a company becomes, the beauty is you can still boil down 5-8 key numbers that are most crucial in determining success. When you build your financial forecast, the most powerful part is in determining the true drivers of success.
What are the key dial-movers you need to focus on? Every number in your financial report is not weighted equally. Usually, there are a few key performance indicators that many other numbers will rely on. Companies who find their KPIs and focus relentlessly on them are the ones who outperform the rest.
Build out scenarios into your forecast
Do you ever have a big idea like for a marketing initiative or partnership but just aren’t sure if it’s practical? You know it will be a big commitment of time and resources to launch it, which is risky in case it doesn’t work. It’s also risky in the event it does work but you weren’t really prepared for what it would take to accomplish it.
This is another benefit of a forecast. With well thought out financial forecasting, you can build out the scenario and walk through what it would look like if an initiative succeeded or failed. Analyzing the numbers will help you make educated assumptions on what the action would mean for the company.
You can also use the forecast to break initiatives down into smaller experiments. Rather than devoting a ton of time and money, you could start with a small test and then project what it would look like over the long term. This enables you to look forward to testing different ideas in order to make the best decisions possible.
A financial forecast gives you additional control over your company’s future. Rather than continuing look backward, a forecast allows you to define what success looks like and build a roadmap to get there.
If your organization isn’t already building and regularly analyzing financial forecasts, Paro’s expert FP&A services can help your business build a forecast, analyze financials, and conduct scenario analysis so you can gain the key financial insights you need to drive your company forward.