Financial Forecasting Isn’t Optional Anymore
Written by Amanda Bower | Published: July 17, 2023
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Trying to future-proof your business can seem like a daunting task. After all, no one can predict the future—but good financial forecasting comes pretty close.
Understanding the financial landscape of your business can provide you with the insights needed to make strategic decisions that help steer your company’s future. With a clear view of your financial performance, you can pinpoint areas of strength, such as profitable sales channels, and areas of weakness, such as high expenses that need optimization.
In this article, we’ll discuss the importance of financial forecasting, why it’s time to rethink it, and how it can help you tackle the different challenges that may arise along the way.
Why It’s Time to Rethink Financial Forecasting
Change in business is inevitable. However, it typically takes place over decades. The last few years have brought about some of the most unstable conditions businesses have weathered.
To anticipate business growth, confidently make investments, and scale your business for profitable growth, you need to prepare for change. Financial forecasting is the secret sauce for predicting your business’s best financial future.
Yet, you’ll likely have to navigate these added challenges to make accurate predictions:
- Increased Innovation: Newer, faster, and better products and services are reaching the market daily. To remain competitive, businesses must create new product and service lines rapidly. These frequent changes result in expenses and profits that could dramatically affect your forecast. Financial reports need to identify new opportunities and reflect necessary spending.
- Increased Economic Volatility: Economic changes have rarely occurred with such speed as those of the past few years. Such disruptions can derail even the most accurate forecasting efforts. Historical data has always been a critical part of forecasting. In the current economic climate, it can quickly be rendered ineffective. Modern forecasts need to be drawn from real-time data to be effective.
- Increased Complexity: Technology is changing how consumers shop and how businesses operate. Digital transformations require companies to change operating models and connect with customers differently. Forecasting must reflect these changes and how they contribute to performance.
More than ever, it’s important to rethink your forecasting strategy because…
Financial Forecasting Has Fallen Short in the Past
Traditional financial forecasting has flaws. The process doesn’t always yield accurate results. In fact, only 45% of sales leaders have confidence in their business’s forecasting accuracy.
Yet, the shortcomings aren’t in the act of financial forecasting; they’re in how you conduct the process. Skipped steps, confusion between budgeting and forecasting, and a heavy dependence on historical data can result in predictions that fail to match results.
“But We Have a Budget”
Many businesses find relying solely on an annual or quarterly budget to gauge performance tempting. If you’re meeting your goals, you’re on target. When you’re not, you need to make changes. That’s the traditional way of doing things.
The truth is, relying solely on your budget can actually result in failing to achieve your objectives. Financial forecasting and business budgeting are both processes to help businesses succeed financially, but they have different jobs to do.
A budget outlines what a company wants to achieve over a specific period. It’s developed using dependable data to create realistic financial goals. The budget is a static document based on available metrics like estimated revenue and expenses, expected cash flow, and expected debt reductions.
Since modern financial forecasts work with changing data, they can change routinely to reflect relevant circumstances. A financial forecast evolves in real-time to provide accurate insight into the factors that affect your financial position.
External Factors Skew Forecasting Results
While it’s true that historical data is a vital part of financial forecasting, it’s only one piece of the puzzle. It’s no surprise that major disruptions like the COVID pandemic affect the accuracy of business forecasts. Such events introduce radical changes that are difficult to factor into a typical estimate.
However, smaller underlying changes happen continually. When forecasts fail to take market volatility and changes in consumer behavior, companies miss opportunities and deliver inaccurate predictions.
Too Many Demands
Traditionally, financial statements are generated every quarter. These statements make financial predictions that influence business decisions and investments.
However, a lack of economic stability and frequent industry changes mean many organizations request updated data more frequently. This can place significant stress on accounting teams.
Doubling the forecasting frequency places a tremendous processing strain on systems, and the time requirements double the workload of accounting professionals. Bottlenecks caused by these concerns can lead to inaccurate forecasts.
Good Financial Forecasting Transforms an Organization
The answer to failed financial forecasting efforts is not to abandon the process entirely. Good and modern financial forecasting eliminates the shortfalls listed above and allows you to form precise predictions to guide business decisions and achieve your company goals.
A forecast evolves in real-time, giving you a cheat sheet to change the future. When a roadblock makes budgeting goals unattainable, forecasts highlight the issue and allow management to course-correct for the best results.
You can gain the following transformative benefits when you adopt best practices for good financial forecasting.
The swift and emergent effects of the COVID pandemic took every modern business by surprise. Businesses with clear insight into their financial health survived (and even thrived) by pivoting their strategy to assist customers during a state of disruption.
Businesses face a variety of external factors throughout their lifespan. While these events aren’t typically as impactful as a global pandemic, they can require a complete shift in business operations. Insights from financial forecasting can help determine if your company’s current strategy is future-proof.
Good financial forecasting utilizes data from all departments to break down silos and open lines of communication between finance and other departments. Financial forecasts are a single source of truth to empower employees across all divisions and levels of seniority to work toward united financial goals. The ability to update information in real time provides financial teams with timely input for the forecasting process.
Financial forecasting can help you envision how various decisions will impact business finances in different situations. Business decisions during growth or downturn can range from layoffs or funding efforts to innovation and new product lines. Forecasts provide insights to compare the potential effects of drastic decisions and avoid missteps.
Controlling Cash Flow
Without accurate planning, you’ll have little control over the money that flows in and out of your business. Every decision is basically a stab in the dark.
Cash flow has a crucial influence on the success of your business. Without proper management, cash flow (or the lack thereof) can become the most significant controlling factor over your operations and decisions. Accurate forecasting helps you manage cash flow and anticipate and mitigate problems.
Achieving Financial Goals
An accurate financial forecast can define the level of your company’s success. A financial forecast uses data from the company’s historical performance and compares it to market and competitive data. By capturing timely, accurate information and keeping track of industry metrics, you can make data-driven decisions that can help you grow your business.
Financial Forecasting Is No Longer an Option
If your budget is your goal, traditional financial forecasting is the insight you need to devise a plan to get there. Companies don’t end up financially successful with solid balance sheets and healthy cash flows by chance. Financial health is cultivated through meticulous data analysis and market insights but may not be enough.
During the day-to-day, the road to financial business success yields something unexpected at every turn. Highly effective financial forecasting allows you to plan for these surprises and make innovative decisions to achieve greater success.
You can’t change or predict the future, but you can adapt your business practices to thrive in the environment it brings. Financial forecasting is a sound investment that helps you navigate the ever-changing environment that can disrupt your business performance.
However, it’s not an easy task. If the demands of modern financial forecasting are placing an undue burden on your internal team, we can help.
Outsourced accounting and payroll services make your life easier at every stage of business. You get the benefits of top-tier accounting professionals handling every service, from bookkeeping for startups to financial reporting and everything in between.
That’s why we provide precise insights and advice to help your team make better decisions to successfully navigate the delicate realm of business finances. Contact us for a consultation to learn how we can help you make confident decisions at every stage.
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