Rule #4 for creating a financial forecast you can trust is to “First look back, then look forward”. (I like to create rules so I put 10 of them in A Quick Start Guide to Financial Forecasting). 😊
But what if you are starting a business, creating a new division within your company, or otherwise launching something new? You can’t “First look back, then look forward” when you have no historical financial results to look back on.
Part of the answer is to consider what you DO have. You have at least some glimmer of an expectation for your new venture. You have an idea for what you are trying to accomplish in this new venture.
And a forecast is basically an expectation of what you believe will happen financially.
In the financial forecasting process, you want to explore those expectations and do your forecasting based on a range of possibilities and your current thinking on how things might unfold from a financial perspective.
Understanding Your Business Model (Financially)
One of the benefits of financial forecasting is that it helps you to better understand your business model. You already have a good sense for what kind of business or venture you are launching. Now you get to “put some numbers to it.”
The process of creating different versions of a forecast will help you learn what the key financial and nonfinancial drivers of performance are. It will force you to think deeply about what makes your new venture tick. It will help you find the “levers” that can move the needle and help it to be successful.
As you move further along in making specific assumptions about financial performance, the process will force you to ask some tough questions.
“Can we really add new customers at the rate I am projecting over the next twelve months? How much will we have to increase operating expenses to achieve the plan? How fast can a salesperson bring on new customers in order to cover their salary and overhead costs?”
The financial forecasting process forces you to look hard for any weak links in your strategy.
You will discover some powerful insights about your business model as you become more intimately familiar with what will really drive financial performance and make your new venture a success.
NOTE: My new book is available at Amazon. Learn more here.
A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow Higher provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter business decisions. Order the book at Amazon. Or learn more here.
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