Best practices for accurate and credible financial forecasting

Accurate forecasts of profitability and solvency are crucial management information for a company’s strategic decisions. Additionally, there are increasing demands from banks, owners, and investors for reliable, credible forecasts on how the company will succeed in uncertain times.

As a company that has provided forecasting tools for over thirty years, we have put our heads together and created seven handy forecasting best practices that can help the finance department achieve better precision and efficiency in their forecasting work.

Focus on key metrics
Don’t get bogged down in unnecessary details. If you approach forecasts with the same extensive process as the annual budgeting, you risk not seeing the forest for the trees. Remember that a forecast should not take more than a few days to create. Be disciplined and keep your focus on the most important areas that can be directly influenced and provide a good return.

Ensure there is always enough liquidity – all the way through.
It doesn’t help to have a million-dollar surplus in December if the company can’t pay its dues in April. Oversight and control of debt and liquidity are crucial for strategy and decision-making, both in the short and long term.

Use the right tools to get the job done on time.
Use software or other digital tools that enables automatic generation of profit, liquidity, and balance scenarios for a smoother and more efficient work process.

Foster collaboration efforts
Involve the organization by making the forecasts available for input and contributions from stakeholders. Be transparent and open about underlying assumptions, methods, and possible risks and uncertainties.

Look up and consider the broader environment.
Stay updated and informed about the broader economic and political environment, including factors like interest rates, inflation, and regulatory changes that can impact the forecast.

Maintain real-time awareness
Always know where you are and what choices you have. Forecasts are perishable and should be refreshed every month. Knowing where you stand helps the company stay on course toward its goals. If something unforeseen happens, ensure you have a solid decision-making basis by simulating outcomes for the best-case, worst-case, and most likely scenarios.

Learn and adapt
Past mistakes and shortcomings are painful, but crucial for making you a better forecaster. Evaluate the accuracy of previous forecasts and learn from successes and missteps. This strengthens future forecasting work and makes the company better equipped to adapt to its surroundings.