For many high-growth companies, the idea of a financial forecasting method is synonymous with a popular four-letter word. No, not that one! We’re talking about CASH, one of the most critical metrics for growing companies.
What the focus on cash can miss, however, is the many ways that a financial forecasting method can help companies make smarter business decisions and run more profitable businesses. When it comes to the fast-paced world of a growing company, making smart business decisions is one of the most important levers you have.
What is a financial forecasting method, and why is it important?
Using a financial forecasting method helps you understand and project your financial situation if various conditions are met. Unlike a budget or spending plan, a forecast is dynamic, and it’s common to adjust it as your business or market conditions change.
A forecast aims to help you continually refine your projections to become as accurate as possible. This gives you confidence about your finances so you can focus more on what you enjoy doing in your business.
Not every client watches the same figures in their forecast (e.g., sales, expenses, cash, profits, KPIs) but what remains consistent is having a high-level view of your entire financial picture.
How does a financial forecasting method help you make better business decisions?
A detailed financial forecast is as essential to your business as a strategic plan. (And some would say the 2 are the same.)
A thought-out financial forecasting method can help you see when it’s time to lean in hard or double down on what’s working. Or it can help you quickly identify when it’s time to back off or slow down to keep your business financially healthy.
As with many aspects of running a company, there’s some nuance involved. But generally speaking, our clients use their forecasts to make a wide range of business decisions.
As a CEO, you may have a general notion of what you should make in terms of income. By using a forecast to make this decision, we can back into your income goal and show you everything that needs to happen in your business to hit your goal. Then, you can pay yourself with complete confidence, knowing you’re not causing a potential cash issue down the road.
Another area where forecasting is helpful is adding new members to the team. Many CEOs consider additional staff as an outright expense equal to the person’s salary, which feels like a huge hit all at once. Using a forecast can help you put this decision into a broader context.
For example, how much additional revenue can you expect from another team member? What’s their ramp-up timeframe? What if you hired more than one person? Or took a phased approach to staffing up?
Hiring employees is more complex than considering their salary a straight expense. A forecast offers you more data points.
If you’re at the stage where you’re considering raising your prices, a forecast can help you here as well. For example, we can model various pricing scenarios to see how they’ll flow through your financial statements.
Maybe you want to see how raising prices at regular intervals (e.g., annually) would impact the bottom line over time. Or look at how to incorporate downstream expenses into your long-term pricing strategy. Here again, a forecast offers the insight you need.
Monitoring the pipeline
A company is only as healthy as its pipeline, but letting potential business give you a false sense of security is easy. Sometimes, clients need tough love to balance their optimism with realism. For example: what’s the likelihood that a prospect will convert based on previous win rates? When do you count something in the pipeline as money in the bank? What specific criteria will you use?
A forecast can help you answer these questions and decide whether to take a conservative or bullish approach (hint: we’re big fans of waiting to count income until the contract is signed).
Empowering the team
This is perhaps the most crucial benefit that forecasting can offer your team. When you involve your team in the development and ongoing management of a forecast, you’re setting everyone on the team up to make better, more informed business decisions.
What’s unique about our forecasting approach?
At Ledge Financial, we see forecasts as a living, breathing, and ever-evolving view of what’s happening in your business and your most accurate source of decision-making insights. That’s why we operate a little differently than some financial firms.
First, we start at the beginning to get your data as clean as possible before using it to build a forecast. Putting in this extra effort up front gives everyone more confidence in the story the numbers tell.
Next, we analyze cash because this tells us how to move forward. Usually, cash follows one of two paths:
- The “oh sh*t” cash flow approach: We know you don’t want to be in this position. So, we’ll join forces with you and help you get back on track as quickly as possible. It starts with a down-to-the-penny financial forecasting method that removes emotion and offers clarity. This approach is about speed and decisiveness.
- The standard cash flow approach: if you’re more flush and need to understand your opportunity better, we like to use a 60/20/20 benchmark. Under this approach, we’re assessing whether 60% of your expenses are for product costs or labor, 20% are operating costs, and 20% of your revenue is income. This view provides a quick indication of where problems may be hiding and gives you clear next steps.
Finally, once we have a clear view of your cash position, we move into more detailed financial advice tailored to your business.
Ready to make smarter decisions?
As number-loving owners, we live and breathe forecasts daily, but we know you don’t. If you decide to work with us, you can trust that we’ll start by getting to know you and your dreams, and we’ll build your forecast with great care.
This relationship-centered approach may be a little different than what you’re used to. We’re OK with that. Being invested in your success is the single most important metric we track. If that sounds like the kind of financial partner you’d like to work with, let’s get started.