Why You Must Master The Art of Financial Forecasting

“How much is your annual turnover?”

It is a question asked of both established as well as emerging enterprises. In the case of an emerging–or completely new company–what the answer really should be is: I don’t know. I haven’t a clue. Your guess is as good as mine.

But what usually emerges from the startup founder’s mouth is an arbitrary number that is highly fictional in nature. What–you think only storytellers and creative writers have the privilege of making stuff up?

Hah!

If the Enron scandal is anything to go by, you know that some of those boring-looking bean counters and accountants are perfectly capable of making stuff up. My apologies if I have offended anyone. I really don’t mean to. I’m a numbers guy, myself… And I promise you that I’m not as boring as I appear. If you scratch under the surface, you’ll find… well, I’m not sure exactly.

You’ll have to find out for yourself, won’t you?

Now coming back to writing fictional numbers… Why bother, you might ask–if the future is a mystery? In this era of COVID-19, why even trouble yourself with writing a financial forecast? Why don’t we all just jump off a cliff and throw caution to the wind?

Because it’s lunacy. It’s even more looney than writing absolutely nothing at all.

So I gaze into the crystal ball and like an oracle endowed with highly dubious magical powers, I make a forecast. I make a prediction. I predict how a business–perhaps even my business–will perform in the future.

The most basic type of financial forecast utilises a profit and loss statement. In a more comprehensive version of this model, all three financial statements–including the balance sheet and the cashflow statement–are all dynamically linked together. The objective is to set it up so that all the accounts are connected and a set of assumptions can drive changes that ripple through the entire forecast.

Because that is how it is in real life, too. Everything has a ripple effect. One thing affects another thing which affects another thing which affects another thing…

So tell me, when you gaze into the crystal ball of your financial future–what numbers do you see?