I refer to financial forecasting as your business route map because laying out a profit and loss forecast will help you to prepare for what is ahead, with the ability to make informed decisions regarding your financial and operational strategies.
A forecast can you help answer questions like; How much better could my business be if I looked at the numbers in advance? What is my growth going to look like? What impact is that growth going to have on my working capital? Can I expand my business and make new hires? And do I need to assess my investment spending?
Here are the four main reasons why a profit and loss forecast is important in your business:
- Goal setting
Many advisers will look at your numbers with you and discuss what has happened in the past few months. The problem I see with this is that you are not looking forward or along your route map to success but looking at what has passed instead.
The past data is useful, but you can’t do anything now about those outcomes already achieved. What has to change? I like the analogy of driving a car because the windscreen looking forward is much larger than the size of the rear-view mirror.
Plans are essential to your business’s survival and a forecast will allow you to look at your business plan and goals and make those tiny adjustments to avoid pitfalls or capitalise on success.
2. Budgeting
To some extent you will need to look back at your spending, so you can assess what has been a sound investment and what has been a cost to you. Forecasting with this data in mind allows you to decide whether an investment is actually a cost and whether it is worth going forward with.
If you anticipate a period of growth in your business, the forecast will show this in advance, and you can decide what to do with that rise in profits. Could you reinvest in your staff, products or services, or further training for yourself or others?
3. Anticipate and navigate around negative changes
This is all about changing your strategy and re-assessing your operational structure to navigate and avoid losses where possible. Knowing what obstacles you may face around the corner and being prepared for them is half the victory. If you have anticipated them with a plan, then you can make changes in a more timely and effective manner.
Financial forecasts enable a business to be active, rather than reactive to situations and that is powerful.
4. Sense checking your assumptions
An effective forecast is built using a mix of established, known data with assumptions, trends, and planned changes. Built this way it has clarity around the variable factors, then you can sense-check these when you compare the actual performance vs the actual outcome.
Now it is clear how important a financial forecast is to the success of your business and personal stress levels, part two of Financial Forecasting will take you through the steps of creating a profit and loss forecast.
In the meantime, you may also be interested in ‘Stop focusing on the wrong numbers’ which touches on using activity metrics to aid forecasting. As always, I am available for tailored advice and guidance, with one hour of free business mentoring. Simply pick a date and time to suit you and we’ll have a no-obligation conversation to help you grow the business you want and deserve.