Part of any Advisor’s role when working with their clients is being able to map a growth plan and plot a forecasting model based on that growth plan. To do this, you need to understand your clients business, their unique issues and the business environment they work in.
We all know that forecasting will help your clients understand the steps they need to take (and the numbers they need to achieve) for sustainable growth. Or maybe they simply want to stay in business long enough to save for retirement. Everyone’s goals are different.
Either way, you know your clients’ goals, you know their business, and you have access to the data. You need to work with them to plot a forecasting model based on a sustainable growth plan.
To produce an accurate financial forecast, you'll need the following materials on hand, along with several steps to follow. So, let’s start with the basics.
What is a financial forecast?
A financial forecast is a projection or estimate of an organization's financial performance, typically over a specified period of time, which could be weeks, months, or years. It involves predicting future revenues, expenses, profits, and other key financial metrics based on historical data, current trends, and various assumptions.
Financial forecasts are crucial for businesses, investors, and stakeholders to make informed decisions, plan for the future, allocate resources, and assess the potential risks and opportunities.
You can create these statements for different time spans for your clients, for example, if you are planning their finances for six months to one year into the future and want to show them some different options. If your client potentially plans to pursue investments in their business, you should forecast the next one to three years of growth.
Financial forecasting is different from budgeting.
Budgets are created for your business based on your income and expenses, but are distinct from financial forecasts. You plan to set aside money, based on specific costs, to take care of income and expenses, and this is a budget.
Financial forecasting is more of a prediction than a budget; it helps you determine the path your business will follow based on past performance and other factors, and your clients will use this to plan future endeavors.
A budget can help determine how forecasted extra revenue will be spent. If you find that your client’s financial forecast says they will have an extra $5,000 in revenue this year, they will then be able to plan on spending a bit more for a new website or some digital advertising, for example.
Showing your clients the three steps to creating their financial forecast.
There are three steps to take to see what the future holds for your client’s business:
- The past financial statements from your client’s company will help forecast their upcoming income, cash flow, and balance. Make sure your clients’ books are organized and clean.
- Make sure projections are accurate. Other than past records, you will need to complete market research, economic trends analysis, and have a clear understanding of your client’s operations and industry.
- Get ready to crunch some numbers. Create a forecast that will encompass revenue, expenses, as well as projected cash flow and profits. Software such as Dryrun will make this process a lot more efficient.
A financial forecast is only the first step. You still have other responsibilities towards your client’s business. That is why they’re hiring you, after all. Once you have created a forecast for your client, you must then evaluate their actual financials and compare them to the forecasts.
Why is this important?
This will help you to be more accurate with your forecasts in the future. For example, if revenue in the spring was higher than forecasted for, this may indicate a seasonal boost your client is unaware of.
It's important to note that forecasts are based on assumptions that might not always hold true, and actual results can deviate from projections due to unforeseen circumstances and changes in the business environment. Therefore, financial forecasts should be regularly reviewed and updated as new information becomes available.
By working with your clients to map out a growth plan that is based on financial forecasts, your clients can be reassured that they are indeed on the right track. It can also indicate whether they need to change direction.
Making the forecasting process easier is convenient for all parties. It allows you to provide more accurate information regarding your client’s business on a regular basis, and it reassures your clients that you are there for them and can provide useful advice that keeps them in business.
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