Accurate financial forecasts can be the difference between success and failure for companies of all sizes. So how do you get them right?
Financial forecasts are often seen as the lynchpin of a business's success. They shape the company objectives, growth and recruitment plans, and even whether or not staff stay loyal or go to a competitor.
But forecasts can only ever be accurate to a certain degree. After all, no one can predict the future and, with there being so many factors that can impact the performance of a company, it can feel impossible to make the right assertions. However, if a forecast isn't accurate, it's basically useless, so what's the answer to striking the right balance?
Here are six top tips to ensure your financial forecasts are as accurate as possible:
Don't stick to one scenario
At the very least financial forecasts should be based on two different scenarios; the best and worst cases. Many businesses have a tendency to be overly optimistic when it comes to estimating future performance, hoping that this approach will inspire and encourage excellence. However, this is counterintuitive and can lead to disappointment, as well as potential business errors.
Determining two scenarios, including one that is more cautious, will give the company a strategy regardless of whether performance is ideal, poor or somewhere in between. This is especially valuable if the success of the business is vulnerable to wider industry or regulatory changes.
Foresee a fluid forecast
Instead of seeing a forecast as something that's completed once a quarter or even once a year, have the perspective that any predictions can be amended at any time. Forecasts stop being useful as soon as they are inaccurate, so ensure they are constantly reviewed and analyzed to make them as useful as possible for the business as a whole.
Measure how accurate the forecast is in relation to performance and make adjustments or recommendations wherever necessary. Having a fluid document will allow it to be as valuable as possible for strategic decisions and business goals.
Focus on what you know
Although many areas of business performance are unknown, there will be certain factors that can be estimated more easily. Outgoings such as company expenses can be calculated to a fairly accurate level without much deliberation, as you can take the most recent year's figures and apply these to the next period. Of course, it's important to allow a small buffer in case third-parties increase their charges or there are unforeseen expenses.
This should feed into the worst-case scenario forecast, highlighting expenses that could be reduced or cut altogether without jeopardizing the company or production levels. This will control the amount of damage if the business goes through a rough period.
Unconscious bias affects every area of business and financial forecasts are no different. Bias can completely jeopardize the integrity of financial estimates, as some people can be completely unaware that a problem even exists. The best way to counteract this is to make it clear and transparent wherever you - or your team - has made an assumption. This will allow others to review it and judge whether it's a fair and accurate prediction or something that has been influenced by prejudice, inaccuracies or an overly negative approach.
Look at historical data
Don't just compare future performance to the last year; instead, evaluate historical data that is accessible. This will help to identify any trends that could affect the business that may not have been clear by just looking at the most recent period. It may also be useful to examine data about the sales process to better understand what makes a highly profitable customer and how often they convert. This will help you to understand how often the highest-value clients are acquired and the process that enables this to happen.
When applied to the context of a financial forecast, this information can help to spot patterns in how profitability may fluctuate over a longer period of time.
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