Have you ever tried driving somewhere you’ve never been before without a map or GPS? You might have gotten to your destination eventually, but along the way, you probably encountered some wrong turns, unexpected detours, and plenty of stops for directions. Running a business without financial forecasts feels a lot like this — disorganized and uncertain.
Forecasted financial statements are a way to “look into the future,” providing you with projections of your income, expenses, and overall financial health. By using these projections, you can strategically allocate your resources, making sure that funds are directed toward the most critical areas to support growth and stability.
If you’re still wondering why financial forecasts are worth your attention, let’s break them down further.
Avoiding “Oh no!” Moments
Picture this: you’re having a big outdoor event, but you forgot to check the weather forecast. Now it’s pouring, everything’s soaked, and you’re scrambling to fix the mess.
Forecasted financial statements are like weather forecasts for your business. They provide a general overview of what’s ahead, including potential variances that might arise, such as weak sales, low inventory turnover, or unexpected cost increases. These numbers give you a clear snapshot of your financial standing under certain scenarios, so you’re never caught off guard.
For example, if your forecast shows a slow quarter, you can plan ahead by adjusting marketing strategies or cutting overhead costs. A little foresight with your finances can save you from those unwanted “Oh no!” moments.
Making Smarter Choices
Should you hire more team members? Can you afford to invest in that fancy new piece of equipment? Is it the right time to expand operations? Financial forecasts can help you answer these important questions with confidence.
Having realistic expectations about your financial future ensures you’re making informed choices. Going back to the scenarios above:
- Hiring new staff: Your forecasted income can give you a clearer picture of whether a new hire makes sense for your budget next year, or if the timing needs to wait a little longer.
- Investing in equipment: Financial projections help you calculate if the return on investment (ROI) justifies the cost of that new equipment you’ve been eyeing.
- Expanding operations: Forecasting lets you evaluate whether your projected revenue aligns with increased operational costs.
Success comes from making business moves backed by reliable numbers, not guesswork. If you have a big decision coming up, take another look at your forecasts before making the leap.
Strategize your Taxes and Manage your Cashflow
All businesses and owners are required to make quarterly estimated tax to ensure that come tax time, you are not hit with an unexpected tax bill. Worse, the penalties and interest are at a record high of 24% for underpayment of taxes. With a financial forecast, you have a better handle of your estimated taxes allowing you also to take advantage of tax savings strategies before the deadline. For many business owners, their Tax Bill can be one of the larger expenses, which can throw off your cash flow. By forecasting your financials, not only are taxes managed in a timely manner, but cash flow can be adjusted to minimize large payouts.
Your Secret Weapon for Securing Funding
Thinking about applying for a business loan or pitching to potential investors? Financial forecasts could make or break your chances.
Lenders and investors are drawn to businesses that show they’ve done their homework. When you’re sitting with potential backers, handing over detailed, thoughtful projections shows that you understand your business and have a tangible game plan moving forward.
It’s about credibility. While passion and a great idea can get their attention, a strong financial forecast shows you’re serious about executing efficiently. Want to make an impression? Show them the numbers that back up your ambition.
The Big Three: Essential Financial Forecasts
An effective financial forecast typically includes three key statements:
1. Income Statement Forecast
This is a breakdown of your expected income and expenses over time. It answers the all-important question, “Are you on track to make a profit or lose money?”
Example: Imagine your forecast predicts robust sales in Q2 but higher costs due to a seasonal product launch. Knowing this, you can plan to allocate resources carefully or adjust your strategy to maximize profitability.
2. Balance Sheet Forecast
This provides a snapshot of your future financial position by showing what you own (assets) and what you owe (liabilities). It helps evaluate whether your foundation is strong enough to support your goals.
Example: If your business plans to take on a loan, your balance sheet forecast can show how the debt will impact your overall financial stability.
3. Cash Flow Statement Forecast
This is your essential “money in, money out” tracker. It tells you if you’ll have enough cash to pay your bills on time. For many businesses, cash flow forecasting is the difference between survival and closure.
Example: Say your forecast reveals a cash shortfall in December. That’s your signal to secure funding ahead of time or adjust your spending plan to avoid running into trouble.
Forecasted Financial Statements = Better Business Planning
Forecasted financial statements aren’t just another checkbox for your business plan; they’re the key to staying on the path to success. They prepare you for surprises, guide your decision-making, and make your business more attractive to investors and lenders.
If all of this still feels a little daunting, don’t stress. Schedule a consultation with our team at Prithi Daswani, CPA. We’ll provide you with tailored advice to build financial statements that will set your business up for success.