To thrive in a competitive and global marketplace, you need exceptional financial forecasting processes and a finance team capable of orchestrating them. When financial planning and forecasting are executed well, organizations can withstand economic variability, adapt to revenue and expense fluctuations, and course-correct when challenges or opportunities arise.
When financial forecasting models are done right, they can arm decision-makers with the insights they need to keep up with the changing world of finance.
This guide outlines the nine steps you can take to orchestrate the kind of financial forecasting processes that truly guide strategy.
What is financial forecasting and budgeting? That's not a bad question, as different people use these terms in different ways. Here is a financial forecasting definition to help us get on the same page.
Forecast vs. Plan. For the purposes of this guide, the term "plan" refers to an annual forecast prepared for the upcoming fiscal or calendar year.
The term "forecast" is usually reserved for periodic exercises to adjust your plan to reflect actual performance.
Forecast vs. Budget. A budget is a plan for how you're going to spend specific amounts of money. While this is a vital piece of any forecast, it is just one piece of the puzzle.
A complete forecast should also include projected revenue, assets, liabilities, and cash flow. Truly strategic planners will even take operational KPIs into account.
For the purposes of this guide, we use a financial forecasting definition that denotes not only the annual plan, but also periodic forecasts throughout the year.
Before you can build a comprehensive financial forecast, you need to build an accurate business model. One way to do that is by modeling revenue. An effective revenue model should be able to answer questions like, "Which investments are necessary to grow revenue by 25% next year?" Or, "If revenue remains flat, which programs should we cut to maintain profitability?" With the right model in place, you’ll have the flexibility to run scenarios and examine assumptions so you can answer these questions with confidence.
Revenue models will vary widely based on your industry and business model. For example, a manufacturer might consider variables like capacity and utilization, while a law firm might look at client lists and billing rates. Whatever the nature of your business, the right model will help you get a better handle on revenue so you can drive your business forward.
Read more about sales planning and performance in the eBook Know Your Formula, Elevate Your Sales Planning Game.
No matter what business you’re in, here are a few common considerations that we suggest can help you get a handle on revenue:
In addition to the dollars coming in, your financial forecast will need to consider the money going out. Consider these key factors when modeling your expenses.
Once you've built your model, it’s important to define a cadence and a calendar. Financial forecasting is not a one-off exercise, but rather a practice to develop and refine over time.
Plan. Begin with an annual plan or budgeting process that integrates input from stakeholders across the business to set targets and define requirements. The models you've developed will help you translate these objectives into a financial and operational plan for the year.
Quarterly and Monthly Forecasts. Inevitably, your organization will drift from your forecast. When that happens, you will need to revisit your plan, assess your performance, and revise your expectations. This periodic reckoning should never come as a surprise, but rather as part of a continuous and dynamic planning process.
Find a forecast cadence that works for you. Sometimes these constraints are set externally. For example, you may be obligated to make periodic reports to shareholders or trustees. While some reforecasts may occur on an ad hoc basis, you should establish a consistent cadence, whether semi-annually, quarterly, or monthly. Each reforecast is an opportunity to assess performance and revise assumptions about the future. These shouldn’t replace the annual plan, which will remain relevant for compensation and other targets. Your reforecasts will live alongside your original plan and represent your latest and best predictions of business performance.
Daily and Weekly Forecasts. In some cases, you may need to generate forecasts on a much more frequent basis. Retail, hospitality, and other highly seasonal businesses may engage in daily or weekly monitoring to reflect customer shopping patterns. Other businesses may choose to do a flash weekly forecast around sales or other operational KPIs to ensure that they remain on track.
A useful financial forecast should encompass more than just the strict general ledger chart of accounts. It should also model your underlying operational assumptions. For example, manufacturers might focus on plant uptime, yield, and SKUs, while nonprofits might look closely at grants and membership.
Interested in reading more about forecasting income statements? Read the full WallStreetPrep Guide to Forecasting the Income Statement.
For some organizations, the income statement offers sufficient insight into financial performance. Others, however, will generate a balance sheet and cash flow statement in addition to an income statement. For capital-intensive businesses (such as banks with assets under management or telecom companies building network infrastructure), forecasting CAPEX in the balance sheet is critical.
In some cases, building out a full balance sheet for the future may not be worth the trouble, but an abbreviated set of metrics will be sufficient to forecast how net cash will change over time.
Read an article from The CPA Journal explaining how to prepare a cash flow statement.
"Getting to cash"—and having an understanding of how your operations will impact your future cash position—is essential for smaller organizations without significant reserves, as well as companies looking to raise funds.
Once you construct a comprehensive model of your business and incorporate your insights into your financial forecasting process, you need to define a set of reports you want to use (both internally and externally). Your reports should provide an easy-to-understand view of company health. They should include more than just a balance sheet view of your company's finances, incorporating performance of operational KPIs and "packs" of data you can easily share with your board of directors and management teams.
An efficient reporting process isn’t just about the reports you generate. It's about how you get there.
If you manage reports using only spreadsheets, then you're familiar with the process of bringing together all your data sources, manually importing them into various spreadsheets, and emailing them around for approval. And that doesn't even include the ad hoc requests you receive by email or from people passing you in the hallway.
The key to getting everyone the reports they need, faster and more accurately, is automation. An automated platform simplifies the gathering, reconciliation, and extraction of your data. That alone can transform your reporting processes from a monthly hassle to a dynamic, ongoing driver of organizational change.
So you've automated your reporting. You've established a regular cadence. And you've amazed your stakeholders with the insights you've shared. But if you're still the gatekeeper of information, you may be missing out on a tremendous opportunity. When stakeholders are not directly involved in the planning process, they don’t feel a sense of ownership.
When data is accessible through self-service financial forecasting tools, people will be more likely to adopt a proactive approach to gathering critical finance data, and they’ll come to embrace your plan as their own.
To help you take these steps, you’ll need the right financial forecasting tools. While Excel is where most finance teams get started, it’s not built for scale. As organizations grow and data sources multiply, organizations must turn to a cloud finance solution that can:
Financial forecasting comes down to answering a few key questions. How well can you understand your company's position in the context of the economic environment? How much insight can you get into what's driving opportunity and risk? And perhaps most important of all, how ably can you communicate these insights to decision-makers throughout your organization? With the right financial forecasting tools, you can have all those answers right at your fingertips—and you can help every team member feel that they’re part of the process.