The ability to predict the future has long fascinated and perplexed mankind. In fact, we’re obsessed with it! Ranging from reading daily horoscopes to placing sports bets based on videos of animals “predicting” the winning teams. Thankfully, successful businesses don’t rely on such dubious methods, but instead use financial projections. Projections, or forecasts, are incredibly important and are a must do for businesses of all sizes for the following reasons:
They provide opportunitiesto setbenchmarks
Financial projections for both short and long-term periods involve setting targets and defining your business drivers. Setting these targets and KPIs allow you to monitor your progress, measure success, and reaffirm that your business is heading in the right direction. For instance, a small startup would use it as a yardstick for their business’ growth; while investors would compare actual results with the projection to determine if everything is on track, promoting accountability both within the company and to its investors.
Forecast issues and possible remedies
“To be prepared is to think negatively…have a contingency plan for when all hell breaks loose. There are a lot of things I don’t worry about, because I have a plan in place if they do.”
-Randy Pausch, author The Last Lecture
It’d be foolish for anyone to believe that no issues or challenges will arise over the course of time. However, financial projections allow you to be prepared to handle them and make the appropriate adjustments. Forecasting software can greatly helpwith this process, as they can quickly compile various scenarios using variables set by its users; creating “what if” situations based on past issues or upcoming trends, allowing you to be prepared to handle and adjust to changes quickly and without delay. Planning software can also be used as feedback-control to adjust your forecast based on certain factors, such as labor wage hikes or changes in material cost.
Aid in mapping out a course of action
Preparing a financial projection also shifts your focus beyond typical daily tasks to assessing the business as a whole, providing an opportunity to strategize on achieving targets and laying out an action plan; all the while, working with the progress benchmarks set earlier. You may find it necessary to adjust your KPIs after going through the exercise. As those goals may not be feasible or were set too low. Again, planning and budgeting software is both convenient and helpful in providing past performance data to validate strategies and implement at plans.