Much like the weather, your business’s finances may change. Some months you may have more income than anticipated, and in other months, you may find money going out due to unexpected events. This can make your business seem unstable, but it is actually completely natural.
One of the ways that you can avoid the stress that accompanies a changing financial status is by establishing a financial forecast. A financial forecast is a financial plan for your business that helps you track your income and expenses. It is called a forecast because, of course, you can never guarantee exactly how much income you will receive, or what sort of expenses may arise.
Why are Financial Forecasts Important?
There are two primary reasons why financial forecasts are so crucial for a business. These are:
- A Financial Forecast Allows you to Plan Ahead
As you operate your business, you will find that certain expenses are routine. You will also develop a sense for expenses that change over time. With a financial forecast, you can estimate expenses and how they may change. You can then make a plan for how to increase your income in order to offset a higher expense.
- A Financial Forecast Helps you Plan Profits
If you obtain a loan or capital from an outside source, you will need a plan to show when you think your business will start to make a profit. This is important because you will need to show creditors or investors when you expect that you can begin to pay back their investments. In many cases, having a financial forecast ahead of time can actually help you obtain funding. Banks and investors are more likely to lend you money if they see a well-organized financial forecast.
Benefits of a Financial Forecast
A financial forecast is beneficial for several reasons. As noted above, it helps you plan income and expenses, and can even help you obtain funding. It is also easy to update as your business changes, which is helpful, especially if your business is relatively new or evolving. A good financial forecast can help you evaluate your goals and see how your business is progressing.