Welcome back to Forecasting Fundamentals, answering the common questions around the topic of Financial Forecasting.
Last week we looked at “What is Financial Forecasting” – check it out if you haven’t already!
This week we’re looking at the length of your financial forecasts.
Finding the ideal forecast length
So you’ve decided to create a financial forecast – great! You’re one step closer to understanding your business’ financial health and the future that lies ahead of it.
One of the questions we’re often asked is:
“My business is X, how long should my forecast be?”
It’s not always easy to answer this, there are several questions you need to ask yourself first before you can arrive at the right answer.
Let’s break it down.
Generally speaking, you want your forecast to be long enough to base your future business decisions on.
These decisions usually take the form of answers to “what-if” questions, asking questions like:
- When can I hire more staff?
- When can I afford to make a large capital purchase?
- When can I invest in new product development?
- What happens if there’s a pandemic and I have to close my doors for a year?
Not only should the forecast be long enough that you can ask these questions, it also needs to be long enough to show their consequences. If the business hires 10 people over the next 2 years, what is the impact of this in 5 years time? Some questions have an immediate impact, like paying these 10 salaries. But the benefits of these increased costs might take longer to be realised financially.
If you’re pursuing funding, most banks and investors will require a forecast length of between 3 and 5 years.
This is for good reason as unfortunately, very few startups are profitable straight out the gate.
You need to show investors that you’ve got a solid strategy for growth, allowing the business to recoup it’s costs and ensuring investors will see a return on investment.
These are questions you should want the answers to yourself as well.
What if your business is already established?
If you’re not looking for funding, then the question is:
What do you want to achieve from your forecast?
How you intend on using your forecast will determine its length.
Like with startups needing to approach investors, established businesses will all have different reasons for forecasting. Some do it to ensure they have enough cash to see them to the end of the month, some do it for more strategic purposes like planning growth.
A good middle of the road option is to create a forecast for 3 years, broken down into months.
This length provides a reasonably long view of your business’ future whilst remaining grounded in reality.
Go for longer than 3 years and you’ll find more opportunities for strategic planning, but the further out you go, the less accurate it’ll be.
What about weekly forecasting?
If you’re looking for more granular detail in your forecast, you can break it down into weeks, helping you to see out the near term.
Weekly forecasting offers up the benefit of knowing where and when your cash is going in and out of your business. This is particularly useful if your business is up and running and you want to keep track of short term cash flow.
The downside of weekly forecasting is that by focussing on daily and weekly trends, you do lose sight of the bigger picture, making informed decisions about the future difficult.
If your focus is on weekly sales and bills, it’s difficult to focus on what the business will be like in a few years time – which is why longer term forecasting is more suited to this.
It’s not uncommon to want to do both long term and short term, and this is a great way to keep a close eye on your business whilst having the ability to look further forward.
Planning your business in a dedicated tool
There are a fair few tools out there designed to help you forecast without having to manage a massive spreadsheet (we already know the dangers of this).
Plenty of tools on the market are focussed on your cash flow, using clever algorithms and AI to predict your payments, cash gaps and windfalls.
Whilst these tools are great for focussing on the near term and what’s happening over the next few weeks, they won’t let you forecast for more than a year out.
This is why we created Brixx, a tool for long term strategic decision making, allowing you to plan up to 10 years in the future.
Brixx uses an easy to understand component structure acting as the building blocks to create a full model of your business.
The beauty of Brixx is that you can toggle these components on and off for quick scenario tests, or drag and drop on our Timeline to change the start date of an activity.
Your inputs are then translated into beautiful reports and a fully interactive dashboard.
See how easy it is to plan your business’ future by starting your free, no obligation trial today.