Leading with vision calls for foresight and focus. Having a sense of direction is key to attaining goals. When you know what’s likely ahead, you can set realistic benchmarks that lead to your desired reality.
In finance, the best way to predict your company’s future is to create financial forecasts. Forecasts allow you to make educated predictions based on data and specific scenarios. If you want to determine the outcome of a set of actions, a forecast will show you. With that knowledge, you can decide which path will lead to the most favorable returns.
In this way, creating financial forecasts is like gazing into binoculars. Suddenly, the horizon becomes a lot clearer. Longer term business goals come into sharper focus. Much like binoculars, financial forecasts give you better visibility into your company’s future.
Want to learn how to get your company on board with effective financial forecasting?
Here’s how to most effectively predict what’s ahead for your company.
Align Your Financial Forecasts with Strategy
The traditional forecasting method many companies use can be improved. Why? Because it’s too linear, spreadsheet-based, with the typical process like this:
In this method, upper management typically creates the plan without input from key members in the finance department. Because this method does not leverage information from vital areas throughout the company, it may not be congruent with the company's best financial interests.
Your ideal financial forecast is cyclical with budget managers and other stakeholders contributing to its creation. Share the plan with them to gather their thoughts and expertise. When you make it a team effort, it’s much easier to align your forecast with strategy and business priorities.
By shifting from a linear process to a collaborative cycle, you will include multiple perspectives for a well-rounded and up-to-date picture of the future:
Use “What if” Scenarios
Imagine that you want to determine the possible outcomes for your actions. You’re at a business crossroads and deciding which is the best direction to take your company. Creating forecasts with multiple scenarios can point you in the right direction. You can also see what will likely happen after a sequence of events.
To get a comprehensive look at what’s ahead, make one optimistic scenario and one cautious scenario. For example, what are the financial impacts on investments your company is considering to generate higher growth? On the other hand, what would happen if those projections fall short? In so doing, you’ll know what to expect after different scenarios that lead to varying degrees of growth.
Implement Rolling Forecasts
Your forecasts should also evolve to reflect your company’s current state. Traditional forecasting happens on an annual basis. These forecasts may be out-of-date because they’re not keeping up with business dynamics.
What’s the solution?
Implement rolling forecasts.
With rolling forecasts, you continuously make projections. It’s a very proactive way to predict your company’s future. Because you constantly have your eye on the horizon, you can adeptly navigate the business landscape. You can also proactively develop courses of action for any conditions that may arise.
Ultimately, rolling forecasts give you a clear sense of vision for the short- and long-term future.
Forecast Your Expenses
In addition to forecasting your revenue, it’s important to forecast your expenses. What do they consist of? Start with your fixed expenses, including rent, utilities, and similar costs. Then factor in variable expenses, such as payroll, sales, marketing and production. Determine what they are for the month, quarter or year ahead.
As you forecast expenses, consider how the above costs will change with revenue. As revenue increases, for example, your expenses in specific areas may also likely increase. When using multiple scenarios, you can also determine which costs to reduce in a cautious scenario.
Because revenue and expenses are inextricably linked, knowing how to manage your expenses in various stages of growth will optimize your company’s spending.
Present Your Forecasts
You have created accurate financial forecasts, and now it’s time to present your findings. Your team members and company stakeholders will be interested in knowing the outlook. When you share your forecasts, you enable everyone to get in sync with your company’s priorities and goals. Presenting your forecasts in an informative, engaging, and clear way is essential to communicating your vision.
By harnessing the predictive capabilities of a cloud-based financial planning program like Adaptive Insights, you can create forecasts, reports and dashboards that will put your company’s future into sharper focus. Furthermore, you can use these forecasts to bring everyone on board with strategic initiatives.
Want to bring your company’s future into focus? Learn how Adaptive Insights can help you make accurate forecasts with a demo.