Every good forecast is built on solid assumptions, and it’s important to review those assumptions regularly, but nobody wants to live in their financial models 24/7...so, how often do you really need to update your forecasts?
It really just depends on 2 things:
This part is pretty straightforward. For example, if you rely on a few large unpredictable deals each month, you'll want to update your forecasts as soon as a deal's timeline changes. Or, if you're constantly testing new marketing campaigns, you'll likely need to update your forecasts both pre-launch (when plans/timelines are approved) and post-launch (in case certain assumptions aren't playing out as expected). Basically, any time your outlook changes, so should your forecasting assumptions. Otherwise you'll always have forecasts based on some old reality, and you won't be able to see what that delayed implementation, or that new referral program means for your finances going forward. Outdated assumptions make your forecast useless, so if things are changing every day, then you might need to update certain parts of your model daily (or at least weekly). But not always...
If your business is fairly stable and there aren't too many surprises after you put a plan in motion, then you might be able to let your assumptions and forecasts sit untouched a month or more at a time. However, as a rule of thumb you should never go more than a quarter without taking a serious look at whether your assumptions still hold true, or whether there is any new information to consider and add to your model. It doesn't matter what business you're in - things change. Update your assumptions any time they do.
Forecasts aren't just there so you can update them. They can be used more proactively when you're making decisions large and small, so it's important to think about when you should lean on your financial model and cash flow forecast for insights, and what you want it to tell you.
If you just want an idea of where your business is headed long-term, based on the way things have generally been going, then you might be able to skate by with monthly or quarterly reviews, just checking in and making a few updates whenever you're curious. However, in this day and age, most businesses need a lot more visibility and control over their financial situation, so they're typically going well beyond that basic level of casual quarterly check ins.
Let's say there are a couple of cool things coming up on the horizon (e.g. new product launch and partnership) and they seem like they'll probably be great for the business. Don't just wait until they're about to happen, and then go update your forecasts. Ideally, you should be jumping into your forecasts before those types of decisions are even made, to see exactly what the impact would be to your finances. That way you can see how your margins, cash flow, and other key financial drivers will react before you pull the trigger.
To take it a step further, what if you have an A vs. B decision, or you're choosing between multiple courses of action? In this case, you won't just go update your forecast. You'll need scenarios.
What are scenarios?
Scenarios are copies of your main financial model and cash flow forecast - like a parallel reality - where you can explore different combinations of assumptions, and then compare the outcomes against your main forecast. For example, you might look at your forecast and see a cash shortage on the horizon, and you’re not sure whether you should liquidate product, cut costs, get a loan, or raise a round of equity financing to plug the gap. It can be easily cleared up by building a financial model and cash flow forecast for each option, and comparing the outcomes to see which one makes the most sense for your business. Then when you pull the trigger, you can do it with full confidence and get back to business.
As a final piece of advice, it’s always good practice to build a set of best and worst case scenarios for your business, and review those models quarterly. Even if the odds of a wild swing are slim, it’s better to know ahead of time what could happen if the worst case scenario unfolded, or even if you started growing way faster than expected, so that you know how to react.
We live in a crazy world, but if you stay on top of your forecasts and use them wisely, you’ll see things coming from a mile away.
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