The power of financial forecasting – and how you can get it right

I don’t know for sure who coined the expression, but there’s a saying that ‘an unsophisticated forecaster uses statistics as a drunken man uses lamp-posts – for support rather than for illumination’. When it popped into my mind the other day, it struck me that it can also be applied to financial forecasting. Done well, forecasting can be key to a business’s success. Done badly, it’s at best a waste of time and at worst can cause financial damage.

The more accurately you can predict your company’s financial future, the more useful it is. It allows you to strategically plan for growth, anticipate challenges and ensure the long-term sustainability of your business. In this blog post, we’ll explore the power of financial forecasting and the ways it can drive your business forward.

What is financial forecasting?

Financial forecasting involves using historical data and current trends to predict your company’s financial performance over a specific period. It provides insights into revenue projections, expense estimates, cash flow and potential profits and losses. Armed with this knowledge, you can develop strategies to meet your business goals.

Advantages of financial forecasting

1. Informed decision-making. Financial forecasting equips you with a clear picture of your company’s financial health. This insight helps you to make informed decisions on everything from resource allocation to expansion plans.
2. Growth planning. Financial forecasting can identify growth opportunities and potential barriers to growth. This allows you to allocate resources strategically to achieve growth faster.
3. Risk mitigation. If you forecast financial challenges ahead, this allows you to take measures to mitigate risk. Whether it’s a possible cash flow shortage or declining revenue, forecasting lets you plan for worst-case scenarios.
4. Resource allocation. Forecasting allows you to allocate resources efficiently, whether it’s budgeting for new projects, hiring additional staff or investing in marketing. Forecasting helps you to allocate resources to areas that promise the highest return on investment.
5. Financing. If you’re seeking financing or investment, accurate financial forecasts provide potential lenders and investors with a transparent view of your business’s financial health and direction. This helps to build their confidence in your plans.
6. Operational efficiency. Forecasting helps you to optimise your operations by identifying areas of inefficiency or overspending. It can also help you to streamline processes and cut costs where necessary.

Implementing financial forecasting

If you’ve not yet dipped your toes in the waters of financial forecasting, you may be wondering how to get started. However, if you don’t have in-house expertise, a THP accountant could help you chart a path through the following steps.

1. Gathering data. Start by collecting historical financial data, including revenues, expenses, and other relevant metrics. The more accurate and comprehensive your data, the more reliable your forecasts will be.
2. Setting realistic assumptions. Base your forecasts on realistic assumptions. Consider factors like market trends, economic conditions and industry developments that could have an impact on your business.
3. Creating multiple scenarios. Develop ‘best-case’, ‘worst-case’ and ‘most-likely’ scenarios to account for various outcomes. This allows you to prepare for a range of possibilities.
4. Regular reviewing. Financial forecasting is an ongoing process. Therefore, you should regularly review and adjust your forecasts as new data becomes available and as your business evolves.

Management accounts and outsourced FDs

Many smaller businesses don’t use financial forecasting. However, when they grow to a certain size, owners often realise that it’s something they need to help them grow efficiently. In an ideal world, financial forecasting is a task that would be done by an experienced finance director (FD).

If your business is not yet at the stage of being able to recruit an FD, we can help you with our outsourced FD service. Our expert accountants will provide with a regular, detailed set of management accounts. These include a balance sheet, KPIs, cash flow and profit & loss figures. In addition, they’ll help you identify the best KPIs for your business and assist you with cash flow management. They can also help you secure finance and offer impartial advice as a ‘critical friend’.

Whether you choose to work with THP or go it alone, good financial forecasting is more than some kind of crystal ball. Done well, it’s a crucial tool that allows you to make well-informed decisions, chart your growth and succeed earlier. Get in touch with one of our accountants today if you’d like to learn more.