How a Financial Forecast Can Be Your Competitive Advantage
by Pat Stokowski, on May 9, 2019
As CEO in your company, you are in a constant search of improvement. Anything that can provide an advantage or growth opportunity is means less stress for you and an improvement to the bottom line.
But many CEOs will put most of their opportunity-seeking into focusing on marketing and sales efforts for growth. This makes sense and is certainly not a waste of time.
However, we think many CEOs would benefit more from building out a simple financial forecast. A financial forecast is a forward-looking financial projection allowing you to create and plan your company’s future. It’s something every CEO worth their weight knows they should do and yet many don’t do because they don’t have the resources available, don’t have the team to execute, or just can’t get to it with everything else they have on their plate.
But, a financial forecast can mean life or death for a business.Here is how the financial forecast can be a massive competitive advantage.
A Financial Forecast Forces You to Be Intentional
The repeated monthly, quarterly and annual cycle of a business can be so consistent that you can fall into a trap of just going with no clear direction.
Sure, you’ll likely have a revenue goal, but where is this whole thing really going? Are you taking action just to take action or is there a concrete plan for the future?
A financial forecast is a great tool to be candid with yourself about where the business currently stands and where it is going.
We recommend creating a one-year financial forecast where you extrapolate where the business is currently heading and where it would be if everything continued.
Seeing this visually allows you to make some plans. You can also decide if where you are heading is truly where you want to be. If it’s not, you can make adjustments and see what needs to change.
The key is, you won’t drift through the year and see where you land. You’ll have to have a real conversation about what you want and how to get there. This is a massive advantage in and of itself because being intentional will make you purposeful and more likely to get the results you are going for.
Make Faster Adjustments
In life, the way we get what we want is to start down a path and continually make adjustments as we run into challenges and roadblocks. Businesses are the same, no matter how large they are.
In your forecast, you’ll set a target and then start taking action to reach that target. Inevitably, things will not go as planned. You will miss targets and find certain assumptions were completely off base.
Believe it or not, this is a good thing. It’s better to catch these mistakes quickly because you can make adjustments.
Think of how far ahead a company that is constantly adjusting and iterating to hit their target will be versus a company who is just continuing to move forward and then looking backward at the results.
The goal of a forecast is not to create a perfect projection, but to give a tool for accountability to ensure progress is being made.
Clarity with Key Performance Indicators
No matter how advanced or complicated a company becomes, the beauty is you can still boil down 5-8 key numbers that are most crucial in determining success.
When you build your financial forecast, you’ll have a chance to see where you are now and where you are trying to go.
The most powerful part of building it is in finding out what are the true drivers in whether you will succeed or fail.
What are are the key dial movers you need to focus on? Every number in your financial report is not weighted equally. Usually there are a few leading indicators that many other numbers will rely on.
These numbers are your KPIs and the companies who find their KPIs and focus relentlessly on them are the ones who outperform the rest.
Do you ever have a big idea like for a marketing initiative or partnership but just aren’t sure if it’s practical? You know it will be a big commitment of time and resources to launch it, which is risky in case it doesn’t work.
It’s also risky in the event it does work but you weren’t really prepared for what it would take to accomplish it.
This is another beautiful benefit of a financial forecast. With a forecast, you can build out the scenario and walk through what it would look like if an initiative succeeded or failed.
You can start to analyze the numbers and make educated assumptions on what the action would mean for the company.
You can also use the forecast to break initiatives down into smaller experiments. Rather than devoting a ton of time and money, you could start with a small test and then project what it would look like over the long term.
Now you can start to look forward with different ideas and test the ideas to make the best decisions possible.
In each of these scenarios, you are in control as the CEO of your company. Rather than continuing to work and build and then see where you are - you are now defining what success looks like and building a roadmap to get there.
For more information on how to create financial forecasts and gather the key financial insight that will drive your company forward - download our Free Whitepaper on the difference between accounting and finance here.