As a busy business owner or financial executive, you may be tempted to trim nonessential tasks from your to-do list by asking a crucial question about each undertaking: What’s in it for me or my company? That’s a good place to start when considering whether your company should compile periodic business forecasts. But a second question should be: What does it tell others about my company?
Preparing a forecast is important not only for your organization in terms of internal planning, but also for external parties. Not convinced? Let’s explore six reasons to include forecasting in your planning process: three that are immediately important to you and your company, and three that can affect other parties.
3 Reasons to Forecast for Internal Stakeholders
Forecasts provide a roadmap for your future financial performance—one that your sales team, executives, and department heads can use as a valuable planning tool. By predicting revenues, expenses, and cash flows, forecasts enable your business to make informed decisions regarding resource allocation, budgeting, and strategic planning. This proactive approach can help you anticipate potential challenges, identify opportunities for growth, and mitigate risks. Here are three specific ways that your company and its people can benefit from regular forecasting.
1. Forecasts can simplify cash management for distressed businesses.
For businesses facing challenges, creating a 13-week forecast boils down to outlining a short-term financial plan that addresses potential shortfalls and assists in managing any fluctuations in cash. Forecasting revenues, collections, expenses, payroll, and payments to vendors and employees over this period offers your company visibility into its cash position—and reveals when you may need to rely on stopgap bank financing. Creating a 13-week forecast also lets you adjust company spending and modify investment decisions in real-time based on actual cash flow performance, which can enhance liquidity and add to overall financial stability.
2. Forecasts can help you set (and meet) sales targets.
Setting sales targets is a critical part of establishing clear objectives and goals for your sales team. Sales targets provide a benchmark for performance evaluation and help your organization measure the effectiveness of sales strategies. Developing specific sales forecasts and updating them quarterly also supports more accurate revenue outlooks and helps with budgeting and resource allocation, which is essential for driving growth and success in your organization.
3. Forecasts can shape executive bonus plans.
Like sales targets, profit targets provide a clear and measurable performance metric—one that aligns the interests of executives and shareholders. Setting profit targets can motivate your C-suite to focus on strategies and decisions that will drive the company’s profitability and long-term success, and can also hold executives accountable for delivering positive financial results. Linking pay to meeting profit targets can also be a way to evaluate and incentivize executive performance.
Three Reasons to Forecast for External Parties
As useful as forecasts are for the stakeholders within your company, they also attract close attention from various external parties. From banks to appraisers to investors, these parties will look to your financial projections as they assess your business in various ways, such as those described below.
4. Forecasts boost your credibility with lenders.
Presenting banks with forecasts allows them to assess your company’s prospects, which means they can determine the firm’s ability to generate sufficient cash to meet your debt obligations. With this important information, lenders can make informed decisions regarding your company’s creditworthiness and the terms of any financing arrangement. What’s more, forecasts demonstrate your commitment to transparency and financial discipline—key factors in building a strong relationship with lenders.
5. Forecasts help your appraiser value the business.
From a business appraiser’s perspective, detailed forecasts offer an opportunity to assess your company’s performance, identify financial strengths and weaknesses, and calculate its current value. Sharing accurate and well-supported projections can help your appraiser consider potential risks and advantages in order to more precisely assess your business’s worth. This puts comprehensive forecasts at the core of your company’s valuation process.
6. Forecasts attract potential investors.
Anyone considering whether to invest in your company would want to understand the risks and rewards as well as the firm’s revenue and profit outlook. Forecasts help investors make strategic, informed decisions by offering insights regarding the anticipated return on their investment. Potential investors may analyze the forecasts in various ways, whether by examining the underlying assumptions and methodologies of the current forecast or by evaluating the historical accuracy of your company’s past forecasts. Investors may also conduct a sensitivity analysis to understand how changes in key variables or market conditions could impact the forecasted outcomes.
A Valuable Tool for Company Insiders and External Parties Alike
There are many important reasons to prepare thorough, reliable financial forecasts, with the knowledge that they will be scrutinized by parties both inside and outside of your company. A thriving organization can use forecasts to set revenue and profit targets that drive incentives for salespeople and executives. And if your business is in trouble, shorter-term forecasting can be especially helpful to ensure adequate cash flow.
Ultimately, regardless of your current financial situation, accurate forecasts serve as a valuable tool for financial planning and performance management, guiding your business toward its long-term goals and objectives. Have questions about this content? Contact our experts.
