In times of increasing volatility, decision-makers have an even greater need for meaningful, accurate, up-to-date financial projections so they can respond to changes in economic conditions rapidly. Improved forecasting capabilities provide the company with a competitive advantage because they enable recognition of issues and opportunities, support decision-making, and enable the company to take action far quicker than competitors.
Financial analysts weigh a large number of inputs with different probabilities to arrive at a number within an expected range. If financial forecasting is tough for the professionals, it may appear overwhelming for the entrepreneur. A good financial forecast can help you get a better understanding of your company’s cash flow needs and help you invest for future growth. Outsourced accounting services may be a viable solution for small business owners unsure of how to create financial forecasts.
We highly recommend establishing an annual process in which you forecast your results for the next two to three years and then review and adjust the forecast at least semi-annually. Below we have highlighted 5 major benefits of creating financial forecasts that could give your small business a competitive advantage
6 Benefits of Preparing a Financial Forecast
1. You will know what to measure
It may seem surprising, but many business owners do not analyze their revenue streams in sufficient detail to know which products and services truly drive their financial results and why customers buy those products and services from them.
Some products or services may generate large revenues but produce poor gross profit margins. Businesses that focus on the things they do best are foregoing “chasing” revenues in other industries or faraway markets tend to become more profitable.
On the other hand, some businesses fail to emphasize certain areas of their business until they truly realize how profitable those areas could be. Preparing accurate financial forecasts can help your business understand what exactly it is that you are looking at and need to measure to make better business decisions.
2. You’ll know what you need
Are you setting growth targets without thoughtfully understanding the implications of such a target? Some scenarios may include:
- how many new people will need to be hired
- what training new hires will need to receive
- what new software/tools and or support from third parties may be required
Your small business needs to determine growth goals as well as resources required to meet these goals. This way your small business will be able to create an action plan to achieve success. When small business owners fail to initiate these supporting activities, the ability to achieve the growth target is delayed, or unfortunately, sometimes even abandoned.
3. You will know your capacity
Creating a financial forecast will require you to think deeply about your physical facilities and capacity. This includes warehousing and production facilities, as well as workspace for support and service professionals.
By addressing these potential issues in advance, you will have the opportunity to reconfigure space. You may need to replace older and larger equipment with new equipment that provides higher outputs and a smaller physical footprint and space. Initiating LEAN processes in your manufacturing, service delivery, and/or back-office functions may help you streamline your space.
If all else fails, you may truly need to secure new facilities and plan an expansion or relocation.
Regardless of the outcome, thinking through these issues as part of your annual planning process ensures that your growth will not be limited by your inability to produce more products and services in your current physical space.
4. You will understand what is not working
Allowing your business to roll along from month-to-month without evaluating what is and isn’t working is some risky business. When you evaluate what is and is not working on a monthly and yearly basis, you will inevitably find your company supporting old initiatives that have run their course or never really worked in the first place. Identifying these and initiating action plans to replace them is important for long term business success.
Taking the time to determine the revenue produced by various pieces of your small business will help you determine what needs to be re-energized or maybe even abandoned. It’s a good practice to use the annual process of preparing a financial forecast as an opportunity to act on those products and services that are not working. Outsourced accounting services can identify areas of your business that need to be revamped or initiatives that simply need to be cut out.
5. You will know how much money you need
If your small business is facing an opportunity to increase the revenue of a part of your business by twenty-five percent, you may need to expand your line of credit. It is much better to be alert of the upcoming opportunity and alert your banker in advance as opposed to waiting until the day before you have a payroll you cannot meet. If you are aware well in advance, you can also explore your borrowing options in case your banker is not supportive of your plans.
Your forecast of future results doesn’t have to be limited to just your income statement. You should also create a projected balance sheet to understand the implications of your growth plan on working capital and capital expenditures.
6. You will know how to approach growth
Forecasts’ primary forecast are to determine how you are going to achieve your goals, especially your revenue goals. Developing an approach to these strategies is pivotal to how you will run your business in the future. Developing a strategy to achieve this additional growth will guide your actions and help you understand the implications of your headcount, facilities, and working capital.
Limitless Investment and Capital Outsourced Accounting Services & Financial Forecasting
At Limitless Investment and Capital, our expert remote accountants can provide you the forecasting service in-house or onsite, offering you the best financial analysis of your business and meeting your expectations. The forecasting service includes:
- Profit and loss reports
- Cash-flow forecasts
- Detailed breakdowns of creditors as well as debtors
- End of year accounts forecast
- Identify the areas of concern, analyze them and check for any improvements to be made
Contact us TODAY to get started!