Now more than ever, planning for the future is essential for success among business owners. Uncertainties resulting from significant events like the global pandemic and inflation have caused unexpected obstacles and challenges for businesses of all sizes. Financial forecasting allows you to look into the future, preparing yourself and your business for the worst, even while hoping for the best. Not only does financial forecasting help protect the position of small businesses as they are today, but it is also a vital tool for ensuring that your small business is poised for growth opportunities and scaling down the road.
What is financial forecasting?
Financial forecasting assesses past and present financial data, marketplace trends, and other factors that impact projections to predict a company’s future performance. It also allows you to estimate how much revenue they will potentially make in a set period.
Having a comprehensive grasp of your business’s financial position, it’s crucial to understand their profit and loss statements, balance sheets, and cash flow statements. Using historical data from these documents along with real-time financial information allows you to make thoughtful, data-driven run rate projections around revenue and cash flow.
Financial forecasting for small businesses produces two types of predictions: a forecast and a budget. While the forecast anticipates financial results and gives you an idea of how your business is tracking, the budget is essentially a roadmap of how the business will achieve those results.
What are the benefits of financial forecasting?
There are several benefits you can gain from assessing your current and past financial data to make predictions regarding future performance. By utilizing financial forecasting methods, you can make informed decisions, prepare for any possible threats to the business, and minimize risks that could threaten your ability to grow and scale.
Financial forecasting also provides a way for you to have a firm handle on your cash flow, projected sales, and expenses, which gives you better insight into how business finances are tracking over time. Being able to spot factors that could negatively affect your business finances early makes financial forecasting an invaluable tool for business owners.
Here are a few of the core reasons why financial forecasting can help your small business scale in the long run:
It helps you get a stronger hold on cash flow.
Cash flow plays a significant role in any business’s success—or lack thereof. By employing financial forecasting, you can better manage your cash flow and tackle any problems that may arise before they turn into seriously detrimental issues. Cash flow that is not effectively managed can begin to impact business decisions and hinder growth by limiting your ability to invest in key growth opportunities, including marketing and building out your team. A well-prepared forecast and budget will allow you to allocate funds appropriately, investing more in the business areas that turn a higher profit and cutting back spending in less impactful areas.
It allows you to make more informed business decisions.
Having a clear picture of a business’s finances is critical to the decision-making process for small business owners. Without understanding precisely what’s going on under the hood, there’s no way to know the health of your business, what roadblocks may be on the horizon, and where there may be growth opportunities for you to take advantage of. If you have a firm grasp of your business’s projected financial roadmap, that helps you feel empowered to confidently make large and small decisions that will positively impact the company.
It helps you get prepared for tax season.
Businesses that choose not to invest their time and resources into financial forecasting may be able to get by for a bit on a month-by-month basis, but they run the risk of finding themselves in a tight situation come tax season every year. By planning out all of a business’s expenses throughout the year, financial forecasting provides a way to prevent any surprises when the time comes to meet tax obligations.
It can give you better access to financing and credit.
For most businesses, there will come a day when it’s necessary to take out loans or open a line of credit. Tapping into financing can be a great way to take on new growth opportunities or thoughtfully supplement cash flow during anticipated slow periods.
However, lenders often require financial forecasting projections to understand the big picture health of a business’s finances before approving loans or providing credit. Even in the event that they don’t actually require those documents, having them at the ready to share with a potential lender can serve as a strong vote of confidence and increase your chances of securing the financing you need. So by investing in financial forecasting efforts today, you can essentially secure resources for growth and stability tomorrow.
Even during the best of circumstances, financial forecasting is integral to the successful scaling of any small business. In today’s tumultuous times, the need for financial forecasting among small business owners is even greater. Using financial forecasting to grow your business is a sure-fire way to minimize risks, make informed decisions, and be prepared for the unforeseen hurdles that can catch you off guard. No matter what challenges you may find yourself up against as a small business owner, financial forecasting provides actionable financial insights that can inform your business’s ability to thrive and grow in the long term.