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Why Embracing Financial Forecasts Will Make You a Better Advisor

Elon Glucklich

6 min. read

Updated November 22, 2024

Imagine you’re working with a successful Etsy shop owner who wants to open a brick and mortar store. A consultant might analyze their current sales data, conduct market research and provide strategic guidance. An accountant might review their finances to determine whether they have the capital to move forward.

Both provide value as small business advisors by reading through client numbers, identifying trends, highlighting opportunities and warning signs.

But it’s one thing to look at a client’s actual financial results and advise them on how to move forward. To give the best advice possible, advisors must help small business owners look into the future through their financials.

That’s where financial forecasting comes into play.

Financial forecasts defined

Financial forecasts are detailed, forward-looking projections of revenue streams, expenses, and cash flows.

Reviewing past performance for quantitative trends is an important piece of forecasting. But there’s a qualitative piece as well. Think about things like

• •Understanding market trends
• •Competitive forces
• •Seasonality

Factors like these help advisors create accurate forecasts that small businesses can use to make decisions like whether to launch a new product line, hire a new employee, pay themselves a salary, and much more.

One of the most important things for advisors to remember is that forecasting is not a one-time task. It’s an iterative process of business management that’s meant to be revisited as actual results come in. That’s why aiming for 100% accuracy is less important than making educated guesses and adjustments over time. 

Why you need to think about forecasting

Financial forecasting is one of the most important tools for advisors to help clients manage their finances. And it’s not just a desirable skill. According to a recent Deloitte report, nearly 4 in 5 companies consider revenue growth forecasting as the most critical business process in their toolset. 

Think of forecasting as an ongoing plan vs. actual analysis. Just like you meet with your clients on a regular basis – perhaps monthly or quarterly – you can also compare their sales forecast and expense budget to their actual results over time. Effective forecasts project the financial implications of business decisions, helping lay out for a client how their decisions might affect cash flow and profitability.

Making accurate forecasts: the basics

If you’re an advisor starting the financial forecasting process, it’s helpful to follow these general steps:

Understanding the business context

Know the industry, market trends, and specific client needs. If you’re advising a restaurant owner who is considering a second location, for example, research the competitive landscape, regional growth patterns, and the owner’s expansion goals.

Gathering historical financial data

Collect relevant past financial data as a basis for projections. This is where you will want to look at the client’s financial statements from the last several years – or any financial statements if they’re just starting out.

Outlining business rules and assumptions

Define the underlying assumptions and rules that govern the forecast. For example, If your restaurant client wants to open the new location next year, assume a certain increase in construction costs annually based on inflation.

Utilizing forecasting tools

Apply forecasting tools and methodologies to generate financial projections. You can use LivePlan to create a 5-year profit and loss forecast based on the client’s historicals and growth assumptions.

Reviewing and adjusting the forecast

Scrutinize the forecast during regular advisory meetings with the client, making adjustments based on your shared expertise and understanding of their business. These could include raising or lowering sales projections based on actual results.

Monitoring and tweaking over time

Continually compare the forecast against actual results, making necessary adjustments. Review the forecast every quarter against current performance, modifying assumptions as needed.

The importance of financial forecasts in advising

The prospect of looking into the future can feel overwhelming for advisors who base their work in the certainty of their clients’ past performances.

But when advising businesses, forward-looking forecasts can provide invaluable insights into future trends, guiding decision-making and strategic planning. By predicting future financial performance, advisors can provide clients with insights to make strategic decisions and fuel growth.

Here are a few examples of the value advisors can provide through forward-looking forecasts.

Insight into future business trends

Think about an accountant advising that Etsy shop owner. The accountant compiles the company’s financial results into profit-and-loss statements, balance sheets and cash flows statements.

But it could also use financial forecasting models to predict future sales. That process could provide the company a better understanding of their consumers’ buying patterns. The retailer could project sales during peak seasons more accurately, allowing for better inventory management and ensuring sustained business growth.

The advisor’s role in the forecasting process is to find these insights and interpret the projections, relaying information that will help the clients adjust their strategies.

Offering tailored business insights

Consider another example of an advisor-client relationship in the construction industry. The client, intending to bid for a large project, seeks advice on anticipated costs, profitability, and cash flow. The advisor can use financial forecasting to provide estimated profits based on factors like labor costs.

Or, imagine advising a tech startup. The financial forecast you develop will be specific to the startup’s industry and trends. And it will almost certainly change over time, based on factors like technological advancements, the emergence of new competition, and more.

Decision-making and strategy planning

Besides offering a glimpse into the future, financial forecasts play a crucial role in strategic planning and decision-making. From a retailer or restaurant looking to expand, to a tech startup entering a new market, financial forecasts can help determine when the best time for expansion is based on growth targets, market conditions and cash flow. 

Financial forecasting is not a one-size fits all; it’s inherently customized to fit each business’s unique requirements. As an advisor, forecasting lets you offer tailored insights that are particularly relevant to your client’s situation, industry and goals.

The strategic nature of forecasting lies in the ability to weave together business rules, assumptions, and past data to create a roadmap for the future. Advisors leverage their expertise and understanding of forecasts to guide clients toward informed choices. With this information, clients are better prepared to spot and avoid costly missteps.

Risk management and mitigation

Risk management is another crucial reason to embrace financial forecasts. All advisors know that risks arise as businesses pursue goals – market volatility, operational issues, cash flow problems and more.

Advisors add value by anticipating those risks and providing their clients with solutions. If a forecast shows seasonal cash flow dips, an advisor could recommend conservation during those periods to avert financial hardship. 

Forecasts enable advisors to identify risks to businesses and highlight strategies to reduce those risks.

Building trust through financial forecasts

Building client trust is one of the most meaningful benefits of offering financial forecasting services.

As an advisor, providing useful forecasts that give clients more detail about strategic decisions shows your competence to help make predictions about the client’s business future. 

Remember, it’s impossible to know what the future actually holds. With forecasting, you’re making informed guesses based on past results and knowledge both you and your client bring to the table about their business and industry.

Elon Glucklich

Elon is a marketing specialist at Palo Alto Software, working with consultants, accountants, business instructors and others who use LivePlan at scale. He has a bachelor’s degree in journalism and a Master of Business Administration from the University of Oregon.