Welcome to a new series on the Brixx Blog – Forecasting Fundamentals.
In this series we look to break down the basic questions surrounding the topic of financial forecasting.
We know not everyone has time to read some of our more in-depth articles – so these will be short and straight to the point!
With that out of the way, let’s get into the article.
The Basics of Financial Forecasting
Financial forecasting is the process of making predictions about how your business will perform over the course of several months or years.
These predictions are derived from all the activities you undertake and the impacts they will have on your financial position and business goals. This is known as ‘bottom-up forecasting’, but don’t worry too much about this now, as we’ll cover it later in this series of articles.
Some examples of these activities could be:
- Hiring an extra staff member
- Increasing marketing spend
- Developing a new product
- Running a sale or promotional period
It’s important to display these predictions and results in a form that can be understood.
I’ve been using the word ‘predictions’ a lot, I think it’s important to understand that financial forecasting is not about accuracy. In fact it is better used as a decision making tool.
Why is financial forecasting important?
Financial forecasting has many benefits, but the 3 key benefits are:
- Approaching investors for funding
- They need to know your business is viable!
- Setting business goals and budgets
- A good forecast will give you an indication of available cash each month
- Answering “what-if” questions with confidence
- Ensure your business is prepared for internal and external changes
This is why it’s imperative that for your forecasting efforts to be meaningful, you need to present your predictions and results in a digestible manner.
How do I present my financial forecasts?
You should present your forecasts and findings in the form of financial reports – specifically the three key financial reports:
- Cash Flow
- Profit and Loss
- Balance Sheet
Forecasting itself is not about creating a report, it’s all about asking questions about the future of your business.
To understand the impact of these questions on your business, you will need to look at this in the context of your financial reports.
Creating a spreadsheet that can be adapted quickly and easily to answer your “what if” questions is no easy feat, it can quickly become a mess and will stop you in your tracks.
What you need is a ‘model’ of your business, which is a flexible, testable picture of a business that includes all of the business’ activities (like employees, assets, income etc.) – and this model is what is used to generate the reports.
Modelling different scenarios in a tool such as Brixx, is quick and frustration free. Check out how easy it is below:
Once you’ve got your reports and model of your business, you’ll likely want a visual representation of what is actually happening.
Reports are great for seeing the granular detail like tracing the origin of numbers, or looking at a particular line, but it’s hard to see the bigger picture.
You can create charts showing KPIs in Excel to help with this, or use an interactive dashboard like in Brixx:
Charts are crucial tools in making your forecasts digestible, not only to you but to any investors – so ensure you include them!
To wrap things up…
What we’ve covered here only really scratches the surface of the topic of financial forecasting!
You might even come away from this with more questions! In the next few weeks we plan to cover more of the simple questions surrounding financial forecasting, such as:
- How long should my forecasts be?
- What are the best methods of forecasting?
- What is financial modelling?
- How to create a financial model?
- Bottom up vs top down forecasting: What’s the difference?
We’ll add links to these when they’re available!
Of course, we have several in-depth guides and opinion pieces on forecasting which you can check out here.