Financial Forecasting: The Best Practices in Strategic Advising

Think about this process like solving a mystery. And who doesn’t love a good mystery? You have facts, clues, and evidence in the building blocks you’ve established by understanding your client’s goals and doing the benchmark research. 

It’s actually a fun process to methodically work through the pile of information. One bit at a time, asking the next logical question of the data set (and your client), until you have arrived at the best possible scenario: a financial forecast for this business. Not just any business, but this business. Here are some tactics to consider when forecasting.

1. Remember, forecasting isn’t budgeting 

Forecasting and budgeting are two different things. 

Budgeting is about setting limits on spending, usually at a granular level. Budgets are also for a shorter time span, typically yearly or half-yearly, and are not meant to be updated based on what is actually occurring in real-time. 

Financial forecasts are meant to be strategic, so they cover broad categories. Forecasts are meant to be updated regularly based on new information about the business.  Because forecasts project over 3 – 5 years, the regular updating keeps the projected profit and cash more accurate.

This is what makes forecasting uniquely different from budgeting. Budgeting is usually very conservative, and it’s much more granular. Forecasting is about potential. What’s possible? How can we get there?

2. Forecasts are rooted in smart assumptions

Always remember, at its core, a forecast is about assumptions. It’s not accounting, and it’s not budgeting in the traditional sense. Forecasting is making educated guesses about what is reasonably possible and using business rules and the financial model in the software to turn the guesses into projections. 

3. Start with a solid structure

To create a great forecast, you have to start with the building blocks—the structure.

The structure of a forecast is comprised of the basic financial components: revenue, direct costs, expenses (fixed and variable), AR and AP timing, debt servicing, and other assets and liabilities. The components of the profit and loss statement are usually completed first, and then if possible cash flow and balance sheet. Utilizing a cloud-based software application to sync with your accounting data and assist you with the forecasting calculations will make your job easier. 

4. Understand your client’s goals and their limitations

In order to properly forecast those primary components, an advisor must understand the goals of the business owner, as well as what is reasonable for the business, based on its own history and even limitations.  

Limitations are just as important as goals. Can the business owner only work certain hours per week, or only exist in a certain location? And remember that goals for small business owners can often extend beyond profitability and be a mix of personal and business. Are they trying to build personal wealth or a college fund? Or pass the business on to another generation?

5. Consider market trends and competition

In addition to goals and limitations, you’ll want to consider market trends and benchmarks: financial metrics for similar businesses in a specific industry. If you can find software with easy access to normalized industry-standard benchmarks it will save you a lot of time. It’s also great to be able to come back to the benchmarks each month when you check in with your clients to see how their progress is doing against the running benchmarks. 

6. Communicate with the business owner

Here’s an important rule to remember: The business owner owns the sales forecast (often called the “top line”), and the advisor owns the expenses. 

As much as possible, let the business owner predict and own their sales (revenue) goals, and then you help to ensure the expense side is realistic, using all the historical accounting data and benchmarks as a basis. 

It’s their forecast, after all—it should reflect their goals. If their goals don’t pencil out, you’ll need to work with them on a version that does, but you have to flesh out their goals with them.

7. Always have a baseline 

Know what they have the ability to do based on historical performance. Know what others in their industry do. Know industry standards like gross margins, burden rates, and ratios for major expense categories to revenue. 

For instance, what is the ideal rate for SG&A expenses as a percentage of revenue in their industry? A good forecast is always grounded in reality.

8. Don’t forget about hidden costs associated with the growth

This is where your expertise from your profession and your intimate knowledge of their books really come in. Use that expertise to be sure everything is thought through. 

If the client decides to take on a new revenue stream, be sure you help them think through all the new types of costs associated with it and anything that might be unique for their business. Also, be sure you think about their resources and partners—who and what they rely on to run their business. Those add huge depth to a good strategic plan, adding revenue or saving expenses if leveraged correctly.

9. Explore what-if scenarios

Once your original forecast is working well as a roadmap and helping your clients to make confident decisions, you’ll want to consider what-if scenarios. These are new forecasts where you explore business opportunities, like new revenue streams, increased staffing, the purchasing of capital equipment, or even new locations.  

Remember to include what-if scenarios as a value add to your clients in your service package – it’s a big benefit to them. Also, find software that allows you to create what-if scenarios without changing your original working forecast.  

10. Use forecasting tools

As you can see, there are many elements to building a strategic financial forecast. Employing a software tool that includes these components will not only save you time but ensure that your forecast is more accurate and accessible for your clients. And when evaluating tools you also want to consider software that will help you scale. 

These are the features to consider when you evaluate software tools for forecasting:

11. Know when it’s time to update, and when you shouldn’t

This is a crucial skill developed over time with your clients. Know when it’s time to make an adjustment to the forecast, versus providing feedback and working with your client to change their business process. 

For instance, if a revenue goal isn’t being met, be sure to work through all the reasons why before deciding it is unrealistic. If gross margins are off, dig into why. That’s where the advising part comes in. It’s perfectly fine to change forecast projections. Just don’t forget that the conversation about why projections are not being met (or are being beat) should happen before the change is made.  

Your advising feedback is not simply about showing numbers. It’s about getting the business owner to make changes to their business that will keep them aligned to their roadmap, and achieving their goals.

12. Be mindful of price and value to your client

Be sure you’re setting up your advising packages to take into account the value of forecasting to your clients. Your practice can be enormously profitable with this work, but you have to charge for it and be sure your clients understand the value it will bring them.

Establish your foundation with strategic forecasting

You should consider forecasting as a service to your clients. It’s strategic and fun—one part creative and one part structure. Working within a framework of the client’s business model, and adding your own financial instinct and know-how, your drive can help a business owner understand the new potential in their business and push them beyond where they thought they could go! This work is truly rewarding like no other.

If you are new to forecasting and want to learn how, check out our regular webinar series and video resource library.