Businesses of all sizes benefit from financial forecasting but it’s especially important for small to mid-sized businesses because they rarely have the additional resources to ride out financial troubles.
Forecasting starts with examining last year’s financials and then creating a budget based on that history, paired with what you can reasonably expect to see in terms of revenues and expenses in the coming year. Sounds simple enough, especially for experienced business owners. But the most important part – and the part that is most often overlooked – is building in the ability to adjust the forecast as the year goes along.
Forecasting is as much an art as it is a science. After all, you are trying to predict the future and although the future can be planned for, it is not foretold. By not building in scheduled reviews, you’re simply kicking yourself in the foot.
Tectonic, unforeseen shifts in the world as the year goes on can have a substantial impact on your financial forecast. Events such as 9/11 or the 2008 economic meltdown were not foreseen at the beginning of those years, and businesses that couldn’t quickly adjust to the post-event world didn’t last long.
The current loonie dive is another example. Although the loonie started to plummet last year, it has continued to plunge even deeper in 2016. This has the potential to affect revenues and operating costs for many businesses. So as part of your regular forecast review, it’s important to examine the market landscape and how you’re performing within it.
Just because your budget is set, doesn’t mean it can’t change. And just because it needs to change, doesn’t mean you have to increase it – it may simply mean that you have to change how you intend to spend it. Differing expenses, such as technology upgrades for example, can free up money to cover an unexpected sales or increased operating cost shortfall.
The key when planning a financial forecast is to be flexible and to be prepared to review this forecast often. The future isn’t set in stone and a good financial forecast often means the difference between a business that thrives and a business that fails.