Why a Financial Forecast Is Essential for Your Business

A part-time CFO may be what your business needs to navigate today’s complex business environment. Business leaders and CEOs are busy. With little precious time, it can seem impossible to add one more thing to your plate. Financial forecasts may be common knowledge, but few CEOs actually have the time to build a financial forecast for their business. From lack of time to a shortage of resources, there are many reasons you may not have a financial forecast already.

However, this simple tool can work wonders for the future of your business and provide the competitive advantage you need to succeed. Keep reading to learn why a financial forecast is important and how to build one without wasting your time.

What is a financial forecast?
Financial forecasts are most commonly used to predict the financial outcomes for a company. The expenses and income for a business are estimated over a certain period of time, typically one year. Historical data, including accounting and sales, as well as external data from the market or key economic indicators can be used to develop a financial forecast.

Companies utilize financial forecasts to set expectations for the future and determine what is realistically possible for a business. Financial forecasts can also be specific to a certain area of the business. For example, a company may develop a financial forecast for sales.

Why should you create a financial forecast?
As a CEO or entrepreneur, your time is valuable. Much of your focus and effort is spent on seeking new business opportunities, investing in marketing and sales, and looking for new avenues of growth. All of these pursuits are worth your time, but they leave little room for much else.

Financial forecasts get shoved to the backburner all too often. While business leaders recognize their importance, and even intend to create forecasts, they are overlooked due to more pressing matters. A financial forecast may not help you instantly move the needle in the same way other executive moves can, but it will set your business up for long-term success. Financial forecasts provide more than just a simple outlook for the future. They offer a roadmap for your business to follow, setting goals and measuring success along the way.

Gain a clear direction for the future
You likely have sales targets, revenue goals, and growth strategies in plan for the foreseeable future. Reporting for each month, quarter, and year is common among businesses. In fact, it is so common that it often turns into a routine. Have you stopped to think lately about why you project the numbers you do, or what the overall goal is for your business?

Without a clear direction for the future, you are left setting arbitrary goals. Creating a financial model forces you to put concrete plans and expectations down on paper. A one-year financial forecast based on the current path and trajectory of your business is a great place to start. Pay attention to where your business will end up if things continue as they are. Is that where you want your business to be in one year? Are you moving towards your big-picture goals?

A financial model provides a visual representation of the future of your business, so you can decide if things need to change. Approaching your business goals with intention, instead of falling into old patterns, can breathe new life into your company. Also, taking purposeful steps can make you more likely to reach your goals than wondering aimlessly.

Adjust early and often
In business, companies that can pivot are able to survive. Businesses that cannot make adjustments as needed will quickly fall behind the competition. Thankfully, a well thought out forecast can help position you to make adjustments quickly and often. Even the most thought-out plans hit roadblocks from time to time, so preparing for change is essential.

When you build a sound forecast, you set a target or a goal. Over time, you may find yourself moving towards that target too slowly or faster than expected. You may also realize that the initial target you set no longer makes good business sense. Whatever the case, having a financial forecast enables you to line up your expectations with reality.

The sooner you can identify mistakes or notice when things go off-target, the faster you can make the necessary adjustments to get back on course. Instead of reviewing your company’s performance at the end of the year, when it is too late to make changes, use a financial forecast to provide accountability along the way.

Focus on the right KPIs
You likely have countless reports and files of data sitting on your computer. As a business leader, analyzing your company’s performance is a key part of your job. However, there are likely some numbers or metrics you value above the rest. By creating a financial forecast, you can highlight the key performance indicators that make the most sense for your business and cut out the rest of the clutter.

By focusing your attention on the KPIs that move the needle for your business, you can more accurately determine your progress. You can also recognize shortcomings earlier because they are no longer buried under mounds of unnecessary data. Dialing in on your KPIs provides an added level of focus for your business, helping you gain an edge over the competition.

Plan for multiple scenarios
Ideas, big and small, are what keep businesses running. However, tackling a new idea can be a great risk. Investing time and money into a project that does not bring about results can drain your resources, and so can successful ventures that are not planned properly. Forecasts can help you work through what-if scenarios, determining what the result might look like if an initiative succeeds or not.

With the numbers from your forecasting, you can also more accurately predict what the outcome of a scenario would mean for your business. How will it impact the rest of your organization? Financial forecasts enable you to test your theories and walk through ideas without taking a major risk or wasting resources.

Work smarter when you know your numbers
Financial forecasting might sound all fine and good, but what do you do if you do not have the time or resources to build your own? Business leaders can work smarter by contracting out their financial forecast. You do not have to invest in hiring a full-time employee, and you leave your schedule open to focus on running your business.

Reducing Operating Costs for Your Startup Is Essential for Longevity

Cash flow management is already a challenge for startups, but COVID-19 is not making matters better. With unemployment rising and people spending less money on certain goods or services, startups are likely to suffer during this time. However, reducing operating expenses can help a startup stay afloat until operations are back to normal.

Reducing overall operating costs can certainly impact your bottom line, especially as the impact of COVID-19 is felt. Also, reevaluating the budget and allocating funds to different operations can keep essential parts of your business going. Keep reading to learn more about how to reduce the operating expenses for your startup while staying productive during COVID-19.

Review your budget with a new lens

When you created your budget for the year, the coronavirus was not likely to be on your mind. And, with updates and changes happening so fast over the last several months, 2020 can feel like one big game of catchup. Now that shelter-in-place ordinances are lifting and people are venturing back out into the world, it is a good time to reevaluate your operating budget.

Revenue projections are likely in need of an update, and your outlook for 2021 is different now than it was a few months ago. From lower sales numbers to higher churn rates, the priorities of your budget need to be evaluated. However, it is important to avoid simply slashing your budget. Wisely evaluating the numbers may indicate that some areas of your business are actually improving during this time.

Renegotiate contracts

The impact of COVID-19 is being felt across the country. If your business has shifted, it is likely that others connected to you have done the same. You may be able to renegotiate terms or contracts during this time to give yourself some breathing room. From reducing office costs to eliminating subscriptions, there are some measures you can take to prevent waste.

Office Space

If your company has shifted to remote work, you are likely paying for empty office space. Your landlord may be willing to negotiate your terms due to the unprecedented circumstances. In some cases, shelter-in-place orders may prohibit you from working in the office altogether. Review your contract to see if there are any provisions for a situation when the office space is not usable.

Subscriptions

Your startup likely has multiple active subscriptions. Whether you rely on monthly professional services, like IT support, or SaaS licenses to run your business, there might be some room for cuts. Try negotiating with your partners or vendors to reduce subscription costs. You may have licenses that you are no longer using or termination fees that can be renegotiated.

Deferred Payments

In cases where you cannot reduce operating costs in numbers, ask for deferred payments. Lengthening the payment cycle can improve your cash flow temporarily and get you through a rough patch.

Eliminate nonessential tools

When you reevaluate your budget, you may find that it is skewed in one area. Go line by line to review the various tools and services used by your business, determine which are essential and which items can be cut. Reviewing financial statements is a great way to visualize where your budget is going, instead of assuming. You may have duplicate tools, tools that are no longer in use, or items that can be replaced with a less expensive alternative.

Cut Unnecessary Licenses

Reviewing all the tools and services used by your team could also highlight which services have too many licenses. Are all licenses being used, or can some be eliminated? Also, you may be paying for additional functions that you could go without, at least for the time being. Dropping your subscription tier or reducing the number of licenses could help lower operating costs.

Cut Out Paper

While it may seem small, going paperless can help your bottom line. Businesses spend quite a bit on paper, printers, and ink every year. If your team is working remote, there is even less reason to use paper. When you return to the office, you can continue the habits formed during quarantine to reduce the overall paper usage of your business.

Stay flexible

Things are likely to continue changing as we learn more about COVID-19 and its overall impact. There may be unlikely opportunities to reduce your operating expenses over time. The unpredictability of COVID-19 combined with the changing nature of startups makes it important to stay on your toes. You may find yourself considering new or innovative ideas that you would not have previously thought of.

Evaluate More Frequently

Periodically evaluating your budget and outlook can help you stay more agile and flexible. As your startup changes and evolves, your operating costs need to follow. Set up more frequent evaluations to stay on top of your operating costs and adjust as needed.

Pause large investments or projects

For many startups, cash flow is limited. COVID-19 is putting major purchases and projects on hold until businesses can stabilize. Instead of considering these pauses as losses, pay attention to the money you are saving and the cash you are making available.

New Equipment

Were you planning to upgrade everyone’s laptops this year or purchase a new phone system? COVID-19 may not be the right time to make major investments like purchasing new equipment. Instead, stick to only buying what is necessary. Look for refurbished or second-hand items when possible to save on operating costs.

Marketing Initiatives

Unless your marketing initiatives are seeing a positive ROI, it may be time to pause big projects. Instead of rolling out previously scheduled campaigns, reevaluate your marketing calendar to determine what will move the needle for your business. If your customers are pushing off on buying decisions, now might not be the time to invest in sales and marketing.

Utilize Free Trial Periods

If you absolutely must purchase a new service or equipment, take advantage of free trial periods. Ensure the vendor is the right partner for you by testing their product or service ahead of time. In some cases, vendors will negotiate on the trial period if you are serious about buying.

Reduce payroll

Finally, reducing payroll can help lower operating costs. Many startups see this as a last resort because it greatly impacts your operational capacity as well as the individual lives of employees. However, in some cases, it is a necessary measure.

Implement a Hiring Freeze

You can make steps towards reducing operational costs by implementing a hiring freeze. Avoid filling positions unless necessary. Your team may be stretched thin, but you can avoid eliminating current positions this way.

Contract Out

Instead of hiring for new positions, contract out when possible. For example, you may need financial guidance during COVID-19. You can contract with a freelance CFO to work part-time at a lower cost than hiring an executive-level position. Firms like K-38 Consulting provide services from top-notch financial advisors, and you only pay for services when you need them.