What is the Purpose of Financial Forecasting?

First Rule of Successful Businesses: Have a Financial Forecast and Review It Often

Are you trying to understand the purpose of budgeting and financial forecasting and why it is important? The two keys to successfully achieving your business goals are one, having a budget and two, reviewing that budget. Why? Two main reasons:

  1. Building a financial forecast is building a plan for the future. That means thinking about the future and planning what to do if things go right (or if they go wrong) in advance. This can be extremely powerful information to have, and planning can also significantly reduce stress caused by uncertainty.
  2. Knowing how what actually happened differed from what you expected to happen on a detailed basis can help you better understand your business. And the impact your actions have on the results of your business.

Before you run out to build a forecast then realize you can’t actually predict the future… I want to make one important clarification: forecasts are not predictions of the future, they are estimates and guesses that you will check with actual data. And over time, you will get better and better at this. Practice is the key to successful forecasting.

Financial Forecasts Don't Have to Be Perfect Predictions

Perfect is the enemy of the good. This is just as true in forecasting as in anything else. Contrary to popular belief, the most important part of a forecast isn’t that it is a 100% perfect prediction of the future. The most important part of forecasting is regularly reviewing the forecast and comparing it to what actually happened.

A forecast can be as simple as copying the financials from last year or month, pasting them into this year or month and calling it good. Now, this only really works if your business is amazingly consistent with the same revenue and the same costs year-over-year. This is also only effective if you don’t plan on changing anything about your business, like attempting to increase revenue or profits.

However, having at least this level of forecast is still better than no budget. Why? Because it is the act of reviewing your financials with some point of reference that is the most useful part of having a forecast.

Having a point of reference, i.e. a forecast, can help you see when particular expenses are higher than they should be. Causes could include increased pricing from a vendor, someone spending outside of the company policy, fraud, or just simple overspending. The more quickly you discover these abnormally high expenses, the quicker you can take action to do something about them.

Having a point of reference can also help you understand when revenues are higher than expected and discover what some of the determining factors for that higher revenue might be. Did salesforce payroll go up? I.e. did you hire a new salesperson? Were marketing expenses 10% higher over the last three months and they have been historically? Comparing what you expected to happen (your forecast) and what actually happened can be a useful tool to determine what is working and not working in your business.

AutoCFO's Financial Forecasting Solution

AutoCFO is a powerful tool where you can create a forecast for your business in less than 30 minutes. We promise you will not start with a blank slate to fill in! We’ll populate the forecast based on historic data. The forecasting tool doesn’t stand alone though, you also get insightful financial analyses and simplified monthly financial reports with trend charts and beautiful graphs. Compare actuals to your forecast, not just in numbers and percentages but in visual charts over time, and do it anytime, anywhere.

You can even create multiple scenarios for upsides, downsides and model out the effect of investing in your business. This app is about you getting to know your business’s financials so you can stop worrying about them and paint a picture for your business’s future so you can quiet that anxiety of uncertainty.

That is our goal here at AutoCFO, to make the financial review so seamless and straightforward, if not fun (to each their own), at least it’s quick and easy! Get started with your free trial of AutoCFO today.