Last month, we reviewed the importance of financial forecasting and how financial projections can be created for a new business. Today, we will consider how to turn your financial forecast into a strategic asset.
What is a strategic asset?
Strategic assets can be exemplified as business know-how and as such are distinctive, valuable, scarce and have a strong business focus. In short, these are the essence, or core, of your business, model and range from intellectual property, customer relationships, organisational culture to proprietary business processes and brand value, to name but a few.
Before we delve into the processes involved in turning your financial forecast into a strategic asset, we need to state the basics.
It is necessary to recall that a financial forecast is a projection of the future based on historic data and the present business performance.
To determine business performance, one needs to have full knowledge of the business's financial position. This can be achieved by taking a look at your profit and loss statement, balance sheet, and statement of cash flow.
Forecasting can be used to track the performance of the business (based on historical data) and aid decision-making in the future. Therefore, it requires a strategic view of what the future might be like using information from the past.
Unlike financial statements, a forecast relies heavily on assumptions. Thus, one needs to be realistic in creating a forecast.
Identify the key drivers in your forecast. Drivers are activities or inputs that can influence your business operations and finances.
Identifying your key drivers
A unique factor in every business, irrespective of its industry is the presence of key drivers, whether internally or externally. They are capable of impacting the financial aspect of your business.
Some key drivers include:
Production rate
The volume of product and/ services
Plans for growth within the company
Environmental/industry factors
The process
Like every strategy in an organisation, the process of creating a financial forecast consists of planning the forecast, creating it, and executing it.
Planning
Just as the saying goes, failure to plan means planning to fail. For something as delicate as a financial forecast, one needs to plan to improve the success rate. First, you need to:
Establish the goals and objectives of your financial forecast - this entails defining the purpose of the forecast with the result in mind. This can be drawn from the goals and vision of the business For example, if the objective for creating a financial forecast is to determine the financial position of the business at any given time, up-to-date data will be necessary.. It is good practice to highlight at least three objectives for your financial forecast.
Determine likely outcomes - Since we have established that past financial data is crucial in forecasting, we have to plan the future by answering questions like: how much past data do we need in our forecast? How long is the forecast for? To get an idea of how long the forecast period is, you need to know the purpose for the forecast and whether it is for the short or long term.
Set targets - forecasting is more effective when you set targets irrespective of the period it is meant for. With clear targets, you can set out to create your forecast.
Creating the forecast
With a solid plan in hand, the next thing is to create the forecast itself.
Assess the financial viability of the business - this involves gathering and analysing data from the past financial statement, key drivers, and present performance of the business. This gives you a clear picture of where to start, how to integrate the data from the analysis into a forecast for the future.
Think outside the box - sometimes you put on your green thinking hat and put yourself in the shoes of management. Answering strategic questions like; what is the plan for in the business? What objectives can be achieved within a particular period?
Draft the forecast - with a clear understanding of the goals and vision of the business, its historical records, and factors that might influence the forecast, it is now time to create your forecast.
Executing the forecast
This is where you turn your forecast into a valuable asset for management.
Double check your work - the process of forecasting is vigorous as it involves analysing many financial records, financial drivers, and assumptions to make up the final forecast. However, you will need to recheck the projections and assumptions made.
Summarise your forecast - to make sense of all the processes involved in forecasting, it has to be broken down to highlight the key points. After all, the essence of creating a forecast is to communicate it to management to aid decision-making. Therefore, it has to be easy to understand.
Use the information from your financial forecasts - information from your forecast should be able to influence decision-making significantly before it can be considered a strategic valuable asset.
Create a repeatable process - forecasts are predictions and as such cannot be set in stone. Even after presenting it to management, it needs to be monitored and adjusted to match trends and general expectations. Thus the process is continuous. Mastering the art of knowing when and how to adjust your financial forecast is key.
In summary, financial forecasts are not only about using financial statements to make financial projections, it involves using financial forecast as a strategic tool for providing insights to management and integrating it as a core business process.
Email us at enquiries@ovacgroup.com today for a free consultation on your financial forecast process.