The Importance Of Financial Forecasting & Planning

No matter what industry you’re in, one of the most important things to learn for any business is how to do financial forecasting. But it’s something that eludes many businesses, even quite successful ones. After all, what is the role of forecasting in financial planning if you feel like you’ve got a steady stream of income, month to month?

It’s an often quoted adage that Rome wasn’t built in a day. But it’s also important to note it wasn’t built by accident. No, it was planned — and while that plan changed and evolved over the years, there was still a template to work from.

In the present day, good financial forecasting is your roadmap to business success. The importance of financial forecasting comes into play when you’re looking at ways to grow the company, looking to determine future income, and ensuring that the company is operating in a sustainable fashion. Without the right metrics and a forecast in place, you’re just stumbling along. You might be experiencing some success, but you won’t have any insight into how long it will last — or what you can do to sustain it for a longer period. The odds of failing upwards aren’t in your favour!

Good financial forecasting is your roadmap to business success.

Financial forecasting and planning

So what exactly is financial forecasting? As a rule of thumb, a financial forecast will usually set targets and outline projected costs for a period of 2-5 years. Depending on your business, it may be appropriate to break this down at a more granular level — month to month or quarter to quarter. This allows for considerations like seasonal cycles to be factored in, rather than simply pursuing a larger goal without consideration of surrounding circumstances.

It’s also important to remember that forecasting is not budgeting. Budgeting is geared at looking at limiting costs for the business within a specific timeframe — anywhere from a week to a year. Forecasting is geared toward the bigger picture and future-focused; though it may inform future budgeting, it’s a process unto itself.

Financial forecasts and strategies are a multifaceted discipline, but there are a number of key points that need to be factored in, no matter what industry you’re in:

Historical data

How do financial trends affect forecasting? Well, broadly, it’s fair to say that the past informs the present and future. Having historical data at hand will allow you to make informed decisions about a projected future for the business. It will also allow you to identify past successes (e.g. revenue spikes during new product launches) and provide context for replicating them, rather than simply expecting.

Goals

One of the most important considerations during financial forecasting is your business goals. Where do you want the company to be in a year — or five years for that matter? This process can ground your goals in hard numbers, helping you clearly see whether they’re on target, need to be reassessed or whether you should be thinking even bigger.

Operating costs

Operating costs are a non-negotiable part of any business. And they’re not static, either! Staff, supplies, office space, contractors and other expenses all need to be factored in, along with the rising costs that will occur in coming years.

Revenue

What sort of projected income do you expect to see over the forecast period? Why should you expect these kinds of outcomes? This will likely be closely tied to your historical data and can potentially inform future budgeting.

Profits

Profits are distinct from revenue; raw revenue is funnelled back into any number of operating costs, while profits can be used for pursuing new projects, paying dividends/bonuses or placed in reserve for future use. Having a healthy profit margin can make a significant difference to the long-term viability of your business.

Worst-case scenario

No one likes to think about the worst outcome — but if it becomes clear that the forecast isn’t in line with real-world results, it’s critical to have a contingency plan in place to adjust expectations.

Best-case scenario

What if everything goes exactly to plan or even exceeds expectations? Your forecasting may need to be reassessed as new opportunities open, and you hit new heights of success.

Of course, you can’t be expected to do all of this forecasting on your own. Having the right people on your team and the appropriate software in place is essential.

Learn more about financial forecasting with Lánluas

Here at Lánluas, we can assist you with financial forecasting and planning by ensuring that you’ve got the right tech on your side.

By equipping your team with the tools they need, you’ll be able to create better financial forecasts and strategies, setting yourself up for greater success as a result.

So why not get in touch today and discover more about how we can help you reach a whole new level of success with your team?