Unfortunately, not all forecasting tools are created equal. Like anything in life, as they say, there’s levels to this. And getting to that next level takes careful planning, commitment, agility, and most importantly choosing the right tool. These are foundational for any organization’s success, and the process of mastering them typically leads to positive outcomes.
Why are forecasting tools so important?
Companies often need forecasting tools for various reasons, but the top reasons why business owners themselves or their finance staff look to software solutions for help are:
- Preparation to raise capital to attack growth opportunities
- Volatile operating environment causing disruption to staffing needs, cost structures, and customers
- Wanting to build a more financially stable business
The right forecasting tool helps your growth strategy
Fortunately, more tools exist today that make it much easier to guide businesses along that path than there ever has been. But how can businesses be sure they are getting value from these tools and setting their organization up for the best chance of success?
In short, the application must be purposeful and its deliverables must be credible and actionable.
The most successful companies operate from a position of offense. They are confident in the decisions they make on a regular basis, and have a deep understanding of key inputs and targeted outcomes.
People either love or hate Tom Brady, but what gave him the GOAT credentials was his mindset, preparation, exceptional field awareness, and drive. Those were his key inputs, and what drove him to 7 Super Bowl rings, titles, 3 MVP’s, and 15 Pro Bowls over a lengthy 22 year career.
It’s no different in business. The most important factors to a company’s success are their ability to understand and leverage their core strengths, understand the many variables accelerating (or decelerating) their growth (both internal and external), and how to optimize those variables to achieve the outcomes they desire.
Strategies must evolve, but the tenacity to do the blocking and tackling in an age of borderless competition are prerequisites for companies to reach their north star.
The right forecasting tool makes your life easier
The challenge often becomes when companies need a forecast, it’s often a heavy lift to get it up and running the right way so that it’s actually usable, informative, and credible.
According to a recent EY survey, just 9% of organizations are using advanced or leading FP&A tools, while the remainder are using basic or intermediate tools in the level of sophistication. Thankfully smart options do exist. The beauty of cloud-based integrated solutions is that it will do the majority of the heavy lifting through providing a baseline 3-statement financial forecast to work off of, provide immediate short term visibility into a company’s cash flow, and offer a fully customized set of tools to help analyze performance, trends, and model “what if” scenarios.
Adding credibility to the forecast involves going one step further, through embedding the building blocks of your business into the forecast through driver based assumption building. This is the most efficient method of deconstructing your forecast into the variables (e.g. headcount, individual deals or clients, pricing assumptions or tiers, fixed vs. variable costs) that ultimately build up to represent overall performance. Not only does this practice increase accuracy, but you’ll always be in position to understand how key drivers impact overall financial performance, and be able to make quick and easy adjustments to those drivers to fine tune the forecast.
A credible forecast tells a story. A story that portrays how efficient a company is in acquiring new customers, expanding existing relationships, converting its cash flow, building verticals, monetizing partnerships, and hitting its financial targets, among many others.
The forecast must be realistic, but not necessarily precise. Backed up by data, but not overburdened by data. The goal should be to give its readers a 360 view of your business and how well it runs. But how do 3rd party recipients digest, assess and make decisions based on your forecast?
First of all, presentation matters. Unorganized, hard to follow, and incomplete models will immediately create an uphill battle. Which is why traditional business forecasting through excel modeling has serious limitations, primarily through 1) errors and omissions, 2) audit-ability and organization sit with the author, and 3) difficulty and time required in updating.
That's why we made Clockwork
Clockwork sets the standard for any company’s starting point in creating a forecast. No question that every model is different, and every company’s models are different (and should be) from one another. However, the framework and focus on its inputs are the same.
And then after you accomplish that set out goal for which you built your forecast for, it’s just as important to be strategic about how often you need to update your forecast and leverage variance analysis and KPI tracking to make sure at any one point in time the company has the right mix of resources and the right financial and operations strategies.
Regularly going through this process after setting up our initial forecast was crucial in our success at raising our seed round. In other words, we practice what we preach. This is the reason we built Clockwork. To take the heavy lifting out of a process that honestly isn’t fun, but one that is absolutely critical.
As Emily Dickinson once said, “If you take care of the small things, the big things take care of themselves.”
To learn more about how Clockwork helps small businesses realize and work towards a better financial future, create your account to start a free 14-day trial (no credit card required). Connect your QuickBooks Online or Xero account to create your first financial model in minutes.