How to develop a forward-looking financial forecast for your business

Financial statements and tax returns are a rearview glance in the mirror at what has already happened at your organization. Instead of always looking back at your financial data, it’s important to develop a forward-looking forecast.

“It might sound simple, but it can be difficult for business owners because they are working at 100 miles an hour to run and grow their business. They feel like they don’t have an opportunity to step back and do some forward thinking,” says Dave Cain, CPA, a principal at Rea & Associates.

And then even if they do develop detailed budgets or forecasts, they often get put on a shelf and never checked again, he says.

Smart Business spoke with Cain about using forecasts to have a forward-looking mentality on your business.

What kind of forecasts should employers be putting together?

Ideally, you would have a long-term, middle-term and short-term strategy. You’d put together a five-year and three-year strategic plan, along with a 12-month forecast. Then you’d take that 12-month budget and break it down into 13-week cash flow budgets, which makes it more managed pieces that are still flexible to change. At the end of each week, you’d go out another week, so that you always have a forecast that projects out one quarter in advance.

The reality for many business owners is a five-year and/or three-year projection that just collects dust. They may have a one-year budget of financial data, but that may or may not be adjusted throughout the year.

In order for this to work, the forecasts have to be realistic. If there’s a little bit of stretch room, it still needs to be achievable.

You also need someone to be responsible for driving the process. That person needs to constantly review to make sure that your goals actually happen. If the CEO doesn’t have time, then delegate the project to another C-suite executive or your CPA, controller or banker.

From a technology standpoint, it’s never been easier to gather and project this kind of data. You just need to figure out who will read and analyze the information.

What are the biggest benefits of forecasts?

Forecasts give you more accurate data and reports to make management decisions. They help your redirect your dollars, so that you spend your money on things that actually will increase the value of your business without hurting your cash flow.

They increase efficiency because you see everything better. They help you deliberately think about where your money is going and how that connects to your strategic plan, vision plan, mission statement and the overall direction of your company.

For instance, if you think you need a new piece of equipment, take a step back before you make a purchase. Why are you buying it this quarter when you didn’t anticipate it? Is this a knee-jerk reaction? Is it the hottest thing on the market that you have to have, or were you actually strategically planning for that expenditure? Is this the right time in your business cycle to make this kind of purchase?

Where do you see employers hit obstacles with their forecasting? What best practices can help overcome these?

The barriers to forecasting are either time or not having the right internal expertise.

You need to set aside time every day — or at the very least once a week — to think about generating stronger cash flow or revenue. For example, first thing in the morning, grab a coffee, open your 13-week forecast and spend a few minutes looking at your goals and action steps. Make it a habit to think about it every day.

When you’re down in the weeds, sometimes it’s difficult to see the big picture. So, use your advisers accordingly. They aren’t stuck in the day-to-day and can help keep you focused. Are these things realistic, achievable and tied to your overall strategy and vision? What plans do you have to get it done?

If you don’t have action steps and timelines to make your goals happen, the forecast will just be numbers — and probably a waste of time. It’s just like putting together a household budget; nobody likes doing it, but after it’s done, you have to follow it if you want to see results.

And remember, it may take a while to see the outcomes, but it will make a huge difference in both your business strategy and the value of your company.

Insights Accounting is brought to you by Rea & Associates