Is Financial Forecasting Critical for a New Business?

Is Financial Forecasting Critical for a New Business?

Where do you want your business in five years?

Every business has goals. In fact, when starting a business, the first few things that probably come to your mind are plans on how you will drive your business to success. Some even have already set benchmarks to get there—by launching new products on the list, increasing revenue to x amount by next year, and opening x number of new locations in the succeeding years, to name a few.

But, to get from one benchmark to another, you will have to incorporate financial forecasting into your business plans. Only when you put together relevant projections you can create a guiding principle that will help you achieve a full understanding of your financial situation and potential.

Continue reading to discover further the value of a financial forecast for a new business.

The Value of Financial Forecasting for Your Business

A financial forecast is essentially an estimate or prediction of how your business will perform in the future based on factors such as past economic performance, current global and industry conditions, inflation rates, seasonal demands, and marketing efforts.

In a nutshell, you can use it to:

Predict Cash Flow

A negative cash flow is bad, but its consequences are worse. It can result in late payments, potentially hurting your business operations and affecting your credit history.  This can make it harder for you to apply for a business loan in the future. The good thing, however, is that forecasting can help minimise the risks of a negative cash flow by allowing you to predict and plan your cash flow.

Make Smart, Informed Decisions

The accuracy and success of your decisions are largely dependent on your understanding of your business position. A financial forecast serves as a map that provides insights and data about your company, its historical performance, and the overall market trends, all of which are necessary to establish short and long-term goals. It also determines the steps to reach those goals.

Identify the Resources You Need (and When) to Fuel Growth

One of the factors that contribute to inefficiency is the failure to determine what resources are needed at any given time—whether that be cash funding, personnel, or equipment. Your business can significantly benefit from a financial forecast that gives you a clear idea of what you need, when you need them, and how you can fund them.

Reduce Financial Risks and Increase Opportunities

Forecasting can also help you identify risks, which can be anything from competition to talent shortages, thus allowing you to minimise their impact. At the same time, a financial forecast also allows you to determine opportunities and develop plans accordingly.

Prove the Profitability of your Business to Potential Investors

Potential investors want to know whether your business is profitable and understand where it is headed in at least the next three years. They also want to know how long it will take before you reach profitability. In that case, you need a forecast to make those predictions. A financial forecast that bases its data on market trends and historical performance can help them understand how much risk they are taking when they invest in your business.

A financial forecast is paramount to the success of the business yet, so many new business owners overlook its importance. You can benefit from working with a financial modelling agency that will help you develop an accurate forecast and regularly compare it with the actual results to keep you on track.

Did you find this article helpful? Share your thoughts by leaving a comment.