The Importance of Financial Forecasting
Financial forecasts are data-backed predictions of a company’s financial position over a period of time. A CFO should do your financial forecast, at least annually, using historical accounting data, sales trends and a variety of external factors to estimate where the company will be financially throughout the year. However, financial forecasting isn’t something a CFO does once a year and then walks away. A forecast is a living, breathing tool that should be modified as markets and other economic factors change throughout the year.
Why Financial Forecasting Is Important:
It Provides Visibility — Financial forecasting is essential when it comes to making big decisions that affect the future of your company. A good forecast is a tool that can be used to study options and see how each scenario would affect the company's financial position. A good forecasting tool allows a company to make big decisions based on a forecast that is current, which means it has been updated to reflect the most recent assumptions. Proper financial forecasting gives decision-makers visibility to accurately assess risks and opportunities as they arise and make the right decisions on how the company should proceed.
Investors Need to See It — If and when your company seeks investment, having your financial forecasts in good working order is a must. Investors will want to see detailed financial forecasts for your business so they can properly evaluate your company. If you cannot provide them with an adequate financial forecast, they will most likely move on to the next opportunity.
It Allows for Strategic Operations Management — Financial forecasts help you to better plan operations for the year or for the next quarter. Once you have a prediction of your possible sales, liabilities, cash flow, revenue and funds, operations can start planning and making adjustments for staffing requirements, distribution, production and more to keep the company ahead of the game. Forecasts can also identify possible risks before they arise which gives your company time to dodge the risk or manage it with as few losses as possible.
Your CFO should input your financial data into easy-to-read models that can be easily tweaked when changes occur to help analyze the possible financial results of any new market, investment or risk. Also, as an entrepreneur or CEO, it is your job to dream big, and the right CFO should help you achieve your goals while keeping your feet on the ground with comprehensive and rolling financial forecasts.