– Questions every owner, CEO, Board Will Ask if Financial Forecasts Are Not Produced
Decisions related to lending or borrowing money are inevitable linked to the predicted cash flow activity in the future. Therefore a business needs to undertake financial forecasting in order to run all its operations smoothly. Below are some key questions that need to be addressed with respect to financial forecasting:
Has the business got sufficient working capital to be able to survive, growth organically or to take on an acquisition? If not, what are the timing requirements and what are management’s plans to fund any shortfall?
A forecast of the cash flow gives the business a fair amount of idea that there is sufficient money to make payments whenever due. A financial forecast also enables a business to get a picture about what kind of funds are required at what time. If there isn’t adequate amount of funds to invest into the current business propositions, then the management will have to let the revenues to start coming in first. Greater working capital will also have to be supplemented which is typically provided by banks as an overdraft.
What plans are in place to grow the businesses earnings? If no plans are in place or plans are in place without financial targets how can the business grow or management be seen to be in control.
It is vital to make an evaluation of available resources, setting of future goals, strategy for goal achievement etc. All these factors help in determining the kind of earnings that a business will be able to generate in a specific time-frame. Financial forecasting helps a business allocate funds to all such activities. This makes revenue prediction more stabilized and accurate.
What will the earnings of the business be for the next year, three years or five years? Are revenues falling, growing or stagnant, are costs under control or spiralling out of control?
As mentioned above, when financial plans are in place, future revenue predictions become easier and there is greater clarity with regards to whether the revenue is increasing, falling or remaining stagnant. The business also understands which operations under plans require high investment and excess expenditure elsewhere is avoided.
How can we measure the performance of Management and Staff? Is staff producing good results or is the business overpaying its workforce for the return earned?
Similar to any other business plan, financial forecasts too demand routine reviews and amendments in order to work effectively. It is important t make comparisons between the budget forecasts and the final results. This also helps to measure the performance of your staff and management.
What will be the business valuation in one year, three years or five years? Will the value of the business increase or decrease. Does management have a plan to maximise shareholder value?
We know that the value of a business is basically the current worth of its future revenue stream (whatever the firm will generate). So it is obvious that financial forecasting comes into the picture with respect to evaluating the business worth and this helps in formulating a plan on how to increase shareholder value in the future.