Many finance personnel have a love-hate relationship with financial budgets and forecasts. Truth be told, there are more people that hate it more than they love it.
Many leaders think their time can be better spent actually running the business than having to go through this “futile” exercise with an output that is almost always scrapped anyway for being so far from reality.
However, financial budgets and forecasts, when executed correctly is a necessity for any business. It is supposed to not only attract investors or assure stakeholders, it is meant to help in the development of the business´ long term strategy.
As mentioned earlier, unless your financial budgets and forecasts are accurate and dynamic, they are not useful and relevant at all. While it has a huge potential to help an organization succeed, inaccurate and irrelevant financial budgets and forecasts also run the risk of mismanaging the company´s cash flow or tricking decision makers in thinking they are making the correct operational decisions.
Whether or not your organization uses financial projection tools, it is important to look into these 5 ways on how to make your financial budgets and forecasts as accurate and as relevant as possible.
- Use multiple forecasts
Many are rather optimistic when doing financial budgets and forecasts which is why the other end of the spectrum of being very conservative becomes apparent for many organizations as they try to quell too much optimism.
Somewhere in between being very conservative and being too optimistic is what you should aim for. This can be done by using multiple forecasts where you forecast both optimistically and cautiously.
The utilization of at least 2 forecasts ensures that you cover uncertainty or other external factors that might come into play such as introduction of a new product by a competitor, more stringent government regulations or drastic changes in the market. Maintaining flexibility in your planning will allow you to have forecasts that are relevant and realistic.
- Outline your expenses
Your forecasting model should begin by outlining your fixed expenses because these are regular and predictable. After that, identify the costs that are directly affected by revenue.
In addition, look at which projects you have most control over and identify the expenses of these projects. One of the advantages of multiple forecasts is that when the going gets tough, you can easily point at the costs that can be done away with or you can easily identify where the investment opportunities are.
Regardless, always begin with the expenses that are known, controllable, and predictable.
- List your assumptions
The thing about financial forecasts is that it requires you to make assumptions because there are many factors that are not always within your control. The danger with making assumptions is of course the existence of bias in the person creating them.
Because of this inherent and subconscious bias that people have, it becomes more important to list down your assumptions.
- Use historical data or comparable business data for comparison
The quality of your financial budgets and forecasts can only be tested through comparison. While it is not always hard to find data from comparable businesses that you can gauge yourself against, you can always use your company´s historical data so that you can look at your projections and how near or far out they ended up and then look at why your projections were far from actuals. Through this, you can continuously fine tune and improve your forecasting method.
- Regularly update your forecasts
Financial budgets and forecasts are never supposed to be static. It is totally useless to create them at the beginning of your fiscal year and then let it sit there unchanged in the coming months.
It is a good practice to evaluate and constantly re-evaluate them so that you see how close your financial projections are to the actual results. It is also important that your budgets and projections constantly reflect changes and new information so that they stay relevant and realistic. The more accurate and timely your information are, the more reliable your data will be when it comes to using them for decision-making purposes.
Financial Projections for Business
One of the most effective way of ensuring that your business is able to come up with relevant and realistic financial budgets and forecasts is to use a robust financial projection tool.
Performance Canvas by DSPanel is one of today´s most modern and revolutionary budgeting and planning tool. It can be installed and setup in just 5 minutes minimizing disruption in your financial operations.
It also incorporates best practices in budgeting and planning in the solution to make sure that your process is not just automated, it is also streamlined. Multiple scenarios, assumptions, unlimited what-if analysis, rolling forecasts, driver-based budgeting, drill through capabilities are just a few of the many best practices it has incorporated in the tool. To learn more about Performance Canvas, visit www.performancecanvas.com or visit firstname.lastname@example.org.
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