Why having a Financial Forecast is important?
August 8, 2019
All companies should have a financial forecast to become successful.
The financial forecast lays out the foundation so that it can provide structure and guidance for the future. Of course, being organized with up to date data is important for the present. But being able to effectively predict future outcomes will be just as, if not more, important.
There may be some new companies that neglect creating a financial forecast because it doesn’t pertain to the present moment. But this is a mistake that’s best to avoid all together.
Having a financial forecast to look to will actually help with present endeavors as well because the company always needs some sort of goals to reach or else it will be left without direction.
The importance of a financial forecast in its entirety is noteworthy but these four reasons summarize why it is so important.
1. It Tells You What You Need
Knowing how much capital, workers, and other resources you need is something to be aware of at all times.
Being sure to avoid over or under spending on certain resources will prevent misallocation of company assets.
When building a company during the early stages, all assets are extremely valuable and cannot go to waste. Growth will be heavily dependent upon management of these funds.
The financial forecast should state the anticipated amount of resources needed at certain points in development.
The forecast provides a rough but important outline for efficient resource allocation. Knowing exactly what you need to get certain things done lets the company know if it is behind desired expectations.
2. It Provides a Clear Path
The forecast gives much needed guidance so that the company is not moving aimlessly.
Having targets is crucial because it brings order and serves as a reference point for whether the company is being successful or not.
The company needs to always be able to look back at its accomplishments and determine if they were in line with the expectations that the company made before.
Some may be content with whatever outcome, regardless if it was close to the forecast, but this will assuredly lead down a path of dangerous compromise.
The forecast does indeed help show past steps taken but just as importantly, it will show the necessary steps to take in the coming future. It shows where exactly to put your footing.
No matter how diligently employees are or how ingenious the good is, the lack of a plan and forecast will result in wasting important resources and missing out on potential growth.
3. It Displays the Company’s Trustworthiness
The company will undoubtedly need financing.
Most of the time, this will require outside investors of some kind. While things like what the company stands for and industry that it is in may be interesting to investors, the primary focus of these investors is to able to ensure returns on their investments.
Therefore, investors want to understand how exactly the company plans to pay back what they owe. If a company noticeably overlooks the financial forecast, it’ll alarm any potential investors and will be an immediate red flag
If a company is going to ask for funding, it’s an obligation to take the time to assure those providing funding that the company made a set plan to use that money wisely and what the expected returns will be. Even if the company has a brilliant business model, product, or leader, no one wants to gamble with their capital. This rule also applies when the company is looking for a Bank Loan.
4. It Helps Manage your Cash Flow
Having problems with cash flow can lead to a number of problems. These problems prevent the company from running smoothly or efficiently. This entails lost opportunities and hindering growth that could’ve been capitalized upon.
Fully understanding how money moves through the company is vital. If the financial forecast is relatively accurate, it will help foresee any problems that can lead to poorly managed cash flow. Anticipating these issues is an enormous advantage because preparations can be made.
The financial forecast will help avoid these problems that can prove detrimental to success because once these problems begin, it can become increasingly difficult to fix.
It can be difficult to get a business moving forwards but creating a strong financial forecast is a step in the right direction.
Getting the ball rolling is always the hardest part but with a bit of momentum, progress will begin to pick up. Spend the time developing, researching, and strategizing with the founding team so that everyone can be confident in the company’s blueprint.
The forecast will serve as the basic structure from which everything else will stand on.
By Bryan Cho of IdeasVoice US
These additional articles will help elaborate upon the importance of financial forecasting. They will also give founders an idea for how to approach creating one: