Financial forecasts are one of the most crucial tools to succeed in business. They can be invaluable in understanding, presenting and managing your business - if built correctly. It can help you manage your cash, negotiate with suppliers, build your team and be the basis of the valuation of your business.
Financial forecasts are not about an exact science - the numbers are not final - but they equip you to understand the dynamics and relationships within your business and what really drives value. More than anything, it shows you are not shooting in the dark. You have a trajectory and a target of when and how you will get there.
The main purpose is to provide users with information about the financial performance of a business. This information is used to assess the financial strength and can determine many core attributes of the business. That is why financial forecasts relate back to an accounting structure to allow quick understanding and deriving conclusions.
What are the reasons to build financial forecasts?
Opportunity assessment - Forecasts are critical to assessing opportunities and threats. An opportunity may look too good to pass but do the numbers stack up? A financial forecast can ive you that go / no go decision
Business planning - to enable management teams and business owners to effectively manage their business and deliver their plan. From building teams, negotiating with suppliers to setting your prices - a financial forecast will give you comfort in the choice you make.
Target setting - a business should always be setting targets as this is the measurement of success, if you go beyond your estimations - use forecasting to put your line in the sand - this is also imporant for your shareholders to show them the direction of travel.
Raising investment - you need to approach investors with a sound logic and rationale for your valuation and potential. A financial forecast will give you the power to fully articulate your idea or plan. It is important for Startups to know and understand how the Valuation process works so that they can confidently explain their numbers.
Risk identification - Risks are everywhere in business. Financial forecasts help you navigate these challenges by assessing impacts of what if scenarios and ensure that you have enough cash for the rainy days.
Idea validation - Is your idea economically viable business? A forecast will enable you to quantify and validate your business plan and business model, assumptions and vision.
Ultimately, a well built financial forecast will enable you toe make better business decisions and plan for the future.
Without forecasts, you're flying blind, you are not able to stress test pricing or look at alternative scenarios. This is where a robust finance model can superpower you and your team to the next level of understanding of the future and also the "what if" and good preparation can be the difference between sink or swim