For start-ups and established businesses alike, there are few planning processes more critical than financial forecasting. Financial forecasting provides proper, well-informed projections of anticipated expenses and revenues, allowing for strategic resource allocation planning.
While financial forecasting can be a time-consuming process, it is a necessary one for several reasons. For one, investors are unlikely to invest in a company that does not have well-defined, thoughtful financial forecasts. For another, the forecasts allow businesses to create more realistic staffing plans and operational models for short- and long-term success.
Financial forecasting tips and tricks
To maximize the impact of your financial forecasting process, there are a number of tips that can help accelerate the effectiveness of your financial forecasts. Here are 5 things you need to know about financial forecasting:
- 1. Keep things simple and realistic
You need to be realistic about the speed and scope of your business, especially when starting up. You are unlikely to seize 10 percent of market share in year 1 and double that share in year 2. Over time, the forecasting will help you identify the variables that need to be adjusted to maximize profitability, but the underlying model needs to be grounded in reality.
- 2. Begin with expenses
Expenses are usually much more predictable than revenue, particularly in start-ups. The proper financial forecast looks at two types of expenses. The most obvious set of expenses are fixed costs, such as rent, utilities, professional services (accounting, legal, consulting), marketing and advertising, postage, technology, and salaries and wages. The next set of expenses, variable costs, include the costs of goods sold and direct labor costs such as customer service and direct sales.
- 3. Create variable revenue scenarios
Giving yourself various permutations can reduce the need for adjustments once you begin applying actual revenue figures to your forecasting. Consider creating a conservative revenue model that includes a lower price point, fewer salespeople and marketing resources, and a once-per-year product launch over a three-year span. A second, aggressive model can include a higher price point or a low price point for basic products or services and a higher price point for premium items, multiple marketing channels and salespeople, and a more aggressive product launch schedule.
- 4. Adjust forecasts often
While accurate projections can be helpful, the reality is that, in most cases, market conditions and actual results are likely to vary. That’s why it’s important to revisit your financial forecasts regularly. Every day brings new data on sales, costs, sales staff productivity, and marketing responses. Your forecasting needs to rely upon actuals to more accurately project future financials.
- 5. Involve your staff
Staff members are an important resource for making accurate projections. Sales teams, in particular, should be actively involved in providing and revising accurate forecasts and giving you insights into what may need to be adjusted in the near future.
Your financial forecast is a core component of your business plan package. Take care to avoid the most common financial forecasting mistakes. Make sure you give it proper attention so that your audience knows you know your stuff.