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Debunking 5 Common Myths About Financial Forecasting

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Forecasting & Modeling

Do you have a financial forecast model in your business that is updated regularly?
Have you projected your Income Statement, Balance Sheet, and Statement of Cash Flow for at least 12 months?

No matter the size of your business, a financial forecast model is essential for success because it helps you plan and make crucial business decisions.

However, are you having these thoughts right now?

  • “I’m too small to have a forecasting model.”
  • “I don’t know all the variables yet, so I’ll wait until I have more information.”
  • “This is a waste of time. I need to just bring in more business.”
  • “I don’t have the time.”
  • “I don’t know how to do this, and accounting reports such as these make no sense to me.”

Myth 1: Business Size Matters

“I’m too small to have a forecasting model.”

You are never too small to have a good forecasting model. If you are a start-up, it is helpful to build out a model to understand all the variables needed for success. The act of building the model will bring different expenses, revenue ideas, and cash flow requirements to the surface.

Remember: No matter how much time you spend on a model, it will not be right. It will be outdated as soon as you finish. It is not about being right; it is about having a plan formulated in your mind for success. You will get more accurate, but it will never be completely right.

The more you forecast, the more you understand your business, your customers, and the competition. A forecasting model is crucial no matter the size of your company because it will help you make a plan for your business.

Myth 2: Complicated and Unknown Variables

“I don’t know all the variables yet, so I’ll wait until I have more information.”

We’re never going to know all the variables. Sometimes, we actually know very few variables. But, people know more than they think when they put it together in a model.

A financial forecasting model does not have to be complicated. I’ve developed a forecast template that can be put together in 1 or 2 hours, depending on the complexity of the business.

I understand the desire for perfectionism, which many times leads to procrastination. I like the quote by the founder of LinkedIn, Reid Hoffman, “If you are not embarrassed by the first version of your product, you’ve launched too late.” In other words, if you aren’t embarrassed by your first financial forecast, you waited too long.

Myth 3: Not Valuable

“This is a waste of time; I need to just bring in more business.”

I understand the feeling that spending time on financial modeling might take away from more immediate business activities. However, a financial forecasting model doesn't need to be overly complicated to be effective.

A simple model that outlines your revenue streams, expenses, profit, and cash flow can provide invaluable insights. It helps you quickly assess your financial situation and identify areas that need attention, which can ultimately save you time and reduce stress.

Think of the forecasting model as a navigation tool. Just as a map helps you understand where you are and plan your route, a financial model helps you understand your business’s financial health and make strategic decisions. The clarity it provides is crucial for growth and stability.

Myth 4: Time Consuming

“I don’t have the time.”

We all make time for what is important. A forecasting model ultimately gives you the focus and direction to use your time more productively. By setting clear financial goals and regularly updating your model, you can prioritize tasks that drive your business forward.

Consider it an investment in efficiency. With a financial plan in place, you can measure your actual performance against your goals, adjust your strategies as needed, and avoid spending time on less impactful activities. This proactive approach saves time in the long run by keeping you on track and focused.

Every quarter, you’ll need to review your goals and make necessary adjustments. This helps ensure that your business remains agile and can adapt to changing conditions and new opportunities.

Myth 5: Confusing Reports

“I don’t know how to do this, and accounting reports such as these make no sense to me.”

I understand that accounting reports can be confusing if you aren’t familiar with them. If you are a business owner, it is in your best interest to understand the Income Statement, Balance Sheet, and Statement of Cash Flows. Accounting reports such as these are basic and help outside investors, bankers, CPAs, and other consultants and professionals better understand your business. Accounting is basically the language of business.

Take Control of Your Financial Future

A forecasting model is essential to put together a framework of where you are now and where you are going in your business. There are many misconceptions about forecasting. No matter your size, no matter how much you know, no matter how much time you have, or even if you don’t fully understand, have a forecasting model that is updated regularly for your business.

Ready to take control of your business’s financial future? Contact Bender CFO Services today to get started on creating a forecasting model tailored to your needs.