If you are the CEO of a business and not performing in-depth forecasting on a regular basis, your company is not performing at the highest level of which it is capable. A forecast means, “to calculate or predict (some future event or condition) usually as a result of study and analysis of available pertinent data(Merriam-Webster on-line Dictionary).” A forecast does not mean error free but instead what is likely to occur based upon known future conditions, current trends, and actions undertaken that will impact the future. At a minimum, each month company leaders should not only be reviewing past financial conditions, but looking ahead and forecasting profit/loss and future cash positions. The length of the forecast varies but a good range is anywhere from 3-12 months ahead. This action is vital for a business of virtually any size and the reasons are as follows:
- Forces Accuracy of Current Financial Statements- It is virtually impossible to forecast future conditions if a business is unsure of current conditions. How can anyone change something of which they are ignorant? There must be a base of knowledge in order to lay the foundation for a solid forecast.
- Results in Preparation for both Bad and Good Scenarios- Preparation is the absolute key to success in so many areas. When forecasts reveal a potential downfall in profits and/or a weak cash position, actions can be taken now ( sometimes several months in advance) to prepare and possibly reverse the future course resulting in a much better profit and healthy cash balance.
- Makes Management think Strategically– Company owners often times get caught up in the daily ups and downs of the business thereby becoming distracted from the overall picture from a higher level. Continually forecasting conditions enables company leaders to take a look at overall business conditions and formulate strategies to maximize company resources.
Make sure that forecasting is a consistent part of your monthly activities. It will result in a much stronger company.