A part-time CFO is necessary for businesses that do not have a full-time CFO to navigate today's complex business environment. Business leaders and CEOs are busy. With little precious time, it can seem impossible to add one more thing to their plate. Financial forecasts may be common knowledge, but few CEOs have the time to build a financial forecast for their business. From lack of time to a shortage of resources, there are many reasons why a business may not have a financial forecast already.
However, this simple tool can work wonders for the future of a business and provide the competitive advantage a business needs to succeed. Keep reading to learn why a financial forecast is important and why CFO firms need to provide forecasts as a core CFO service.
What Is A Financial Forecast?
Financial forecasts are most used to predict the financial outcomes for a company. The expenses and income for a business are estimated over a certain period, typically one year. Historical data, including accounting and sales, as well as external data from the market or key economic indicators can be used to develop a financial forecast.
Companies utilize financial forecasts to set expectations for the future and determine what is realistically possible for a business. Financial forecasts can also be specific to a certain area of the business. For example, a company may develop a financial forecast for sales.
Why Should A Business Create A Financial Forecast?
Most CEOs and entrepreneurs are extremely busy, and their time is valuable. CEO’s need to focus on seeking new business opportunities, investing in marketing and sales, and looking for new avenues of growth. This is where a fractional CFO firm can assist with supporting the financial side of a business or startup.
Financial forecasts get shoved to the backburner all too often. While business leaders recognize their importance, and even intend to create forecasts, they are overlooked due to more pressing matters. A financial forecast may not help a business instantly move the needle in the same way other executive moves can, but it will set a business up for long-term success. Financial forecasts provide more than just a simple outlook for the future. They offer a roadmap for a business to follow, setting goals and measuring success along the way.
Gain A Clear Direction For The Future
A business must have sales targets, revenue goals, and growth strategies in place for the near future to be successful. Reporting for each month, quarter, and year is common among businesses. In fact, it is so common that it often turns into a routine. Often, businesses do not slow down enough and take the time to think about how their numbers need to be projected, or what the overall goal is for the business?
Without a clear direction for the future, business owners are left setting arbitrary goals. Creating a financial forecast forces a business to put concrete plans and expectations down on paper. A one-year financial forecast based on the current path and trajectory of a business is a suitable place to start. A well-versed CFO knows to pay attention to where the business will end up if things continue as they are. Is that where the CEO wants the business to be in one year? Is the business moving towards the big-picture goals?
A financial forecast provides a visual representation of the future of a business, so business owners can decide if things need to change. Approaching business goals with intention, instead of falling into old patterns, can breathe new life into any company. Also, taking purposeful steps can ensure a business is more likely to reach its goals versus wondering aimlessly.
Adjust Early And Often
In business, companies that can pivot are able to survive. Businesses that cannot adjust as needed will quickly fall behind the competition. Thankfully, a financial forecast can help position a business to adjust quickly and often. Even the most thought-out plans hit roadblocks from time to time, so preparing for change is essential.
When you build a financial forecast, you set a target or a goal. Over time, you may find yourself moving towards that target too slowly or faster than expected. You may also realize that the initial target you set no longer makes good business sense. Whatever the case, having a financial forecast enables a business to line up their expectations with reality.
The sooner a business can identify mistakes or notice when things go off-target, the faster it can make the necessary adjustments to get back on course. Instead of reviewing a company’s performance at the end of the year, when it is too late to make changes, using a financial forecast to provide accountability along the way is critical.
Focus On The Right KPIs
As a business owner, analyzing your company’s performance is a key part of your job. Typically, there are likely some numbers or metrics a CEO values above the rest. By creating a financial forecast, one can highlight the key performance indicators that make the most sense for a particular business and cut out the rest of the clutter.
By focusing one’s attention on the KPIs that move the needle for a business, you can more accurately determine a business’s progress. One can also recognize shortcomings earlier because they are no longer buried under mounds of unnecessary data. Dialing in on a business’s KPIs provides an added level of focus for a business, helping the business owner gain an edge over the competition.
Plan for multiple scenarios
Ideas, big and small, are what keep businesses running. However, tackling a new idea can be a significant risk. Investing time and money into a project that does not bring about results can drain business resources, and so can successful ventures that are not planned properly. Financial forecasts can help a business work through what-if scenarios, determining what the result might look like if an initiative succeeds or not.
With the numbers from a financial forecast, you can also more accurately predict what the outcome of a scenario would mean for any business. How will it impact the rest of the organization? Financial forecasts enable a business to test their theories and walk-through ideas without taking a major risk, wasting resources or even worse, running out of cash.
Financial Forecasts and CFO Services Are In Demand
Financial forecasts might sound all fine and good, but what does a business do if they do not have the time or resources to build their own? Business leaders can work smarter by contracting out their financial forecast to a fractional CFO firm. This is ideal for a business as they do not have to invest in hiring a full-time employee, and they have more time to focus on running the business.
Increased businesses are recognizing the value CFO advisory services can provide for their organization and turning to CFO consulting firms for guidance. The current model of a business using a traditional CPA firm as their trusted business advisor is falling to the wayside. While traditional CPA firms provide valuable services such as tax return preparation, bookkeeping and payroll, etc. they typically do not provide CFO level support.
If you want to start a CFO consulting firm and do not know where to begin, The Expert CFO can guide you through the process. If you are looking to grow your current CFO consulting firm and expand your services, we can teach you how to effectively add new services. Your client base is out there, and we can show you how to access them. Best of all, you can grow your business at a rate that works for you and add services at a sustainable pace.