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7 Qualities of Accurate and Effective Financial Forecasts

Makenna Crocker

6 min. read

Updated November 22, 2024

90% of small business owners believe financial forecasting is crucial to running a healthy business. Despite its recognized importance, only 60% of business owners actually have a forecast.

Why the disconnect? 

If business owners believe forecasting can lead to more confident business decisions and faster growth, why don’t they do it? 

One word—complexity. 

There’s a widespread belief that forecasting takes too much time and requires advanced accounting knowledge to do it right.  

I’m here to tell you that’s simply not true. And by understanding the characteristics of a good forecast, you’ll be ready to jump in and create one for yourself (plus grab a free visual checklist).

Key Takeaways 

A good financial forecast is:

• •Realistic
• •Up-to-date
• •Detailed but not perfect
• •Relevant to your business

1. It’s not perfect

Forecasting is not about perfectly predicting the future. You’re going to be wrong and that’s OK. 

You want to see deviations between your forecast and actual performance. These “misses” or “variances” highlight where your business performed better (or worse) than expected. They represent the areas where adjustments in expectations or direction are needed to keep your business healthy and growing.

If a fear of perfection is holding you back, you’ll still always be wrong and have no idea why. But if you adopt a growth planning mindset and regularly forecast, review, and revise—you’ll get better and better at making more accurate projections. 

You’ll never be perfect. But, again that’s not the point of good forecasting. As LivePlan CEO Sabrina Parsons states, “Accurate is different from right. A good forecast needs to represent your business, not predict the future.”

2. Specific but simple

Financial forecasts do not have to line up 1:1 with your accounting statements. Trying to make them mirror one another will only make forecasting more difficult. 

That’s because your forecasts are meant to be used by you—not an accountant. They should include enough details to reflect your business but remove unnecessary complexity that makes reviewing and updating more time-consuming.

Here are a few examples of this simplification in practice.

• •Bucketing similar revenue streams (like all the pastries for a coffee shop) and expenses (like all of your utilities). 
• •Separately forecasting personnel, revenue, and cash.
• •Starting with just expenses and then grouping them into COGS, fixed, and variable categories later on.

It’s crucial to strike a balance between granularity and simplicity. You want to avoid getting overwhelmed by excessive data while not losing out on critical information.

Remember, you can always add more detail later on if needed.

3. Sets realistic expectations

A good forecast is not some wild over-optimistic hope for your business. It should be a realistic representation of the expectations you have for your business.

To put it another way, your forecast is the future state of your business. It’s what you want to achieve based on the decisions you’re making, the market you’re in, and how you believe customers will react.

Your business plan, financial history, and internal goals should all back up your projections. If they don’t, then you’re either not planning for success or your forecast isn’t setting realistic expectations.

In practice, this means not being overly optimistic. 

Your sales projections shouldn’t be shaped like a “hockey stick” where you suddenly experience explosive growth without reason. You should also account for unseen expenses and hold enough cash to keep your business running.

If that sounds daunting, remember point number one. 

You don’t need to be perfect in your expectations, you just need to back up the numbers. Your forecast will evolve into a more realistic representation of your business as you run it, as long as you keep coming back to it. 

4. Accurately reflects your business

“Accurate is different from right.” While Sabrina was focused on dispelling the myth of perfect forecasting, her statement holds another meaning. 

For a forecast to be accurate it needs to be up-to-date. 

At a minimum, this means that as you bring in real sales, expense, and cash flow data—you use it to update your forecasts. You bring in this real information and see how it impacts your projections moving forward.

If you don’t, your original forecast (which again isn’t perfect) will stray further and further away from reality. Your forecast will become less useful and more likely to cause problems if you still use it to make decisions.

5. Works with your larger financial plan

Your financial forecast should be created separately from your financial statements (balance sheet, income statement (P&L), and cash flow statement).

However, that doesn’t mean they should be used separately. To review performance and update your forecasts—you need to look at your forecasts and financial statements together. 

It’s the only way for you to compare how you performed and dig deeper into specific line items of your business. 

For example, if you notice your actual sales are lower than expected, you can then review your profit and loss statement to see which specific products may have missed the mark.

Putting it another way, your forecast provides high-level insights while your statements are reserved for more granular exploration. Looking at them together makes it easier to identify key movers and dive into the details to see what’s really going on.

6. Easy to update

Forecasting is meant to benefit your business—not hinder it. 

When done right, it speeds up your financial review process, helps you make more informed decisions, and better plan for your business’s future.

You only get these benefits when forecasts evolve with your business and bring in real-life data. You should expect to do this at least once a month—if not more often.

So, if your forecasts are overly detailed and complicated to update, you’ll struggle to stick with this update schedule. It will turn forecasting into the time-consuming and frustrating process that many entrepreneurs believe it to be.

That’s why it’s important to consider how easily your forecasting platform makes updating your forecast after it’s created. While a spreadsheet template, AI tools, or baked-in functionality in your accounting software may be effective at the start—they can become hindrances later on. 

If you can, opt for dedicated financial forecasting software instead. These platforms integrate with your accounting data, automate financial updates, and provide built-in reporting features. 

While not required, choosing a platform that makes updates easier will lead to more consistent and better forecasting.

7. Provides room to explore

You can’t predict the future, but you can prepare for how you’ll respond to potential outcomes. A good financial forecast will help you do that.

This is what’s called scenario analysis, where you explore the impact that internal decisions or external factors have on your business. To do this, you need to duplicate and adjust your forecast based on the specific situation you’re exploring.  

You can use forecast scenarios to help answer questions like:

• •What would it look like if you decided to expand your business?
• •How do the options of leasing versus buying a property affect your potential outcomes?

This is why it’s so important that your forecast is simple, realistic, and easy to update. If it’s not, and you use it for additional scenarios, you’re suddenly multiplying the time investment to keep these forecasts up-to-date. 

If your starting forecast meets the criteria I’ve outlined, then you’ve unlocked the ability to explore any and all possibilities for your business.

Start forecasting today

Entrepreneurs often view financial forecasting as a complex challenge. One that they want to solve but fear they can’t. Hopefully, by knowing what a good forecast really looks like those fears have subsided. 

If you’re ready to create a forecast for yourself, check out our guide on building your first forecast and download our free cash flow forecast and sales forecast templates. 

For a guided forecasting experience, consider trying LivePlan’s revenue and expense forecasting features. You’ll get AI-powered forecast recommendations and a guided forecasting experience that you can complete at your own pace—no spreadsheets or complex formulas required.

Makenna Crocker

Makenna Crocker is the Content Marketing Strategist at Palo Alto Software. Her work focuses on market and social trends, educational content creation, and providing entrepreneurs with small business tips and tools. With a master’s degree in Advertising and Brand Responsibility from the University of Oregon, she specializes in generating a strong and responsible brand presence through social media and sharable content.