Accurate financial forecasts are vital for all businesses. It provides a roadmap for business owners to help them make strategic decisions. Having a viable financial forecast to reference when in business emphasises the need to look forward and reflect on performance, rather than getting caught up in day-to-day business operations. We have outlined below a number of factors to keep in mind when you are creating a Financial Forecast:

1. A Financial Forecast is Not a Budget:

Budgeting is about setting limits on spending, usually at a detailed level. Budgets are also for a shorter time span. Usually, annually, they are not meant to be updated based on what is actually occurring in real time.

Financial forecasts are meant to be updated regularly based on new information about the business. They are meant to be strategic, so they cover broad categories. You should be reviewing and updating these financial forecasts on a regular basis, at least monthly, as well as establishing projections for the next month, quarter, half a year, and even up to 1-2 years.

2. Accurate Sales Forecast is Vital:

The sales forecast is the most important line of any Forecast and this must be managed precisely by internal management. Sales forecasts should be based on historical information and very realistic future events. Overinflated sales forecasts by internal management are a complete waste of time.

3. Industry Comparisons:

A good financial forecast is always grounded in reality. Know what your competitors are doing in the sector. Understand industry standards like gross margins, wage/sales ratio, and ratios for major expense categories to revenue.

For instance, what is the ideal rate for SG&A expenses as a percentage of revenue in their industry? The more the business owner understands the historical performance and the performance factors in their industry the more useful the forecast will be.

4. What is The Main Driver of Performance in Your Business:

For business owners, sometimes it can become easy to lose sight of what really drives performance. It is important that all decisions are made keeping the main revenue and expense drivers in mind. It’s also important to be aware of what these big drivers are so that business owners can better understand how specific results or changes may impact performance.

5. Don’t Forget About Hidden Costs Associated With the Growth:

If your business decides to take on a new income stream, be certain you analyse all the new types of costs associated with it and anything that might be unique to this income stream.

6. Keep Accurate and Timely Data:

Financial forecasts become useless if you are working off out-of-date performance information. It is important to continually bring actual results for completed periods into your forecasted Profit and Loss. This gives you much better information to analyse.

At the same time, there is value in keeping an original forecast scenario running to reference and provide context around changes and decision-making. It can help business owners explain to their teams why they are recommending changes

7. When is a Forecast Unrealistic?

This is a crucial skill developed over time by business owners. Know when it’s time to adjust your financial forecasts, versus making changes to your business processes to improve performance. For example, if a sales target isn’t being met, be sure to work through all the reasons before deciding it is unrealistic. If gross margins are decreasing, spend time investigating as to why they are.

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