The following content is based on the teaching from Philip Campbell in the video listed below and in his new book A Quickstart Guide to Financial Forecasting
There is one big reason to create and maintain a reliable financial forecast.
You have some historical financial statements that tell you what has happened, acting as your rearview mirrors. And you have your current financial statements telling you what is happening, acting as your side view mirrors.
But what is missing for a lot of enTREPreneurs is the view from the financial windshield to help you answer the question “what is about to happen?”.
The one big reason to create and maintain a reliable financial forecast is to help you create a bigger and brighter financial future for you and your business.
It is all about how you drive growth, profitability, and cash flow. Because often times if there is no growth in your business, there is decay. And we have to always be working on profitability because there is competition out there that wants to take down our revenue. Then we have to be working on cash flow because it goes far beyond profitability.
Reaching Your Financial Goal
Reaching your financial goals is about achieving the objectives you set out for when you created the business.
This has nothing to do with greed! It is about recognizing the simple fact that if the cash dries up, business will crash. So whatever the reasons are that drove you to be in the business you are in today, the financial performance will determine if the business survives.
Every day and every month there are specific questions you need to have solid answers for to build your forecast.
- How much money are we going to make this year?
- How much cash can we distribute to the owners?
- Will we need to borrow money to achieve our growth plans?
- How much debt can we pay down this year?
- How much cash should I set aside to pay income taxes?
- What does the financial future of my company look like?
- What will the financial statements look like next month?
Having solid answers to those questions determine what kind of decisions you can make.
If you want to make better business decisions, having a good clear view through the financial windshield will be where you need to start.
A Reliable Financial Forecast
“Some would call ‘on course to hit a rock’ a bad forecast. Assuming it is true, it is a good forecast, even though it contains bad news… I would much rather have good forecasts with bad news than a bad forecast with good news” Bjarte Bogsnes, Implementing Beyond Budgeting.
You should always want to have the information to make better business decisions. And to get the information, you will need a reliable financial forecast.
Reliable – Unbiased, reality-based expectation of financial results that are designed for decision making (not precision). This is to answer what is about to happen
Financial Forecast – A full set of forward-looking financial statements that includes a 2-minute summary. It’s a part of your monthly financial rhythm.
The whole forecast fits into The Monthly Financial Rhythm
The Monthly Financial Rhythm.
When you create a forecast, it is not a dream of what you want to happen, it is the reality of what is about to happen. A forecast is NOT a target. The forecast is to inform you of where you are headed. The rhythm is held together by your goals/ targets.
If you don’t like what the forecast says, make specific changes to get back on track.
Again, the content in this post is based on the teaching from Philip Campbell in the video listed above and in his new book A Quickstart Guide to Financial Forecasting
Interested in learning more about how to connect your financial metrics with your goals? Schedule a strategy call with Kahuna Accounting and we can discuss best practices for driving cash flow, profit, and growth!Schedule Discovery Meeting