Accurate financial forecasts are vital to providing effective advising services. It provides the roadmap for you to guide your clients and help them make strategic decisions. Having a viable forecast to reference when advising reinforces the need to look forward and reflect on performance, rather than getting caught up in day-to-day business operations.
Forecasts really are a necessity. However, an inaccurate forecast or one that lacks specific insights about the business can make them entirely useless.
So how do you ensure that your client’s forecasts are as accurate and viable for strategic planning? By strengthening your own ability to create financial forecasts and communicate results with your clients.
Just like your relationships with clients grow over time, your ability to successfully build actionable strategic forecasts will as well. But that doesn’t mean you can’t give yourself a head start by keeping these tips in mind.
Budgeting is about setting limits on spending, usually at a granular level. Budgets are also for a shorter time span. Typically yearly or half-yearly, and are not meant to be updated based on what is actually occurring in real-time.
Forecasts are meant to be updated regularly based on new information about the business. They are meant to be strategic, so they cover broad categories. You should be reviewing and updating these forecasts on a regular basis, at least monthly, as well as establishing projections for the next month, quarter, half a year, and even up to 1-2 years.
This gives you a wider range of insights to work through and discuss with your clients. It allows you to start more broadly in your exploration and hone in on what’s important right now and how that will affect long-term projections and performance.
In fact, my rule is: The business owner owns the sales forecast (often called the 'top line'), and I own the expenses.
As much as possible, let the business owner predict and own their sales (revenue) goals. Then you help to ensure the expense side is realistic, using all the historical accounting data and benchmarks as a basis.
It’s their forecast, after all—it should reflect their goals. If their goals don’t pencil out, you’ll need to work with them on a version that does, but you have to flesh out their goals with them.
A good forecast is always grounded in reality:
Know what they have the ability to do based on historical performance.
Understand industry standards like gross margins, burden rates, and ratios for major expense categories to revenue.
For instance, what is the ideal rate for SG&A expenses as a percentage of revenue in their industry?
The more you understand their historical performance and the performance factors in their industry the more helpful you can be. That’s why it may be beneficial as a practice to focus on working with clients within a specific niche or vertical to help refine and focus your research.
For business owners, it can become all too easy to lose sight of what truly drives performance. As an advisor, it’s up to you to reinforce the business needs when things do get off track. Bring them back to revenue and expense drivers. Remind them what factors are fixed and what can be adjusted.
Then return to recent accounting history to explore the impact of these financial metrics on their business. You need to help them develop awareness of what these big drivers are so that they can better understand how specific results or changes may impact performance.
This is where your expertise from your profession and your intimate knowledge of their books really comes in. Use that expertise and that knowledge together to be sure everything is thought through.
If the client decides to take on a new revenue stream, be sure you help them think through all the new types of costs associated with it and anything that might be unique for their business.
Also, be sure you think about their resources and partners—who and what they rely on to run their business. Those add huge depth to a good strategic plan, at times adding revenue or saving expense if leveraged correctly.
Forecasts become useless if they’re working off outdated performance data.
For advisors, you likely have your hands in the current accounting data, but it can be all too easy to not bring that information into specific scenarios. That’s where a feature like LiveForecast comes into play—bringing actual results for completed periods right into your forecasted Profit and Loss statement with just one click. This saves you time, effort and allows you to jump right into the analysis.
At the same time, there may be value in keeping an original forecast scenario running to reference and provide context around changes and decision-making. It can help you in explaining why you’re recommending changes. It also provides statements that you can compare and review to understand what the thought process was around outdated scenarios.
The more that you understand what the data represents, why you made specific recommendations, and how actual performance may change your recommended focus, the more value you provide to your clients. And the faster and easier it will be for you to provide tangible insights. Share on TwitterShare on Facebook
This is a crucial skill developed over time with your clients. Know when it’s time to make an adjustment to the forecast, versus providing feedback and working with your client to change their business process.
For instance, if a revenue goal isn’t being met, be sure to work through all the reasons why before deciding it is unrealistic. If gross margins are off, dig into why. That’s where the advising part comes in.
Be sure you’re setting up your tiered pricing to take into account the value of forecasting to your clients. Your firm can be profitable with this work for sure, but you have to charge for it and be sure your clients understand the value it will bring them.
Taking these other tips into account will allow your forecasting offerings to speak for themselves. The more insight that you can provide, the better you can explain their metrics and projections and deliver that in a timely manner, the easier it will be to bring value to your clients.
Your expertise with compiling, analyzing, and reporting accounting data makes your ability to build insightful and actionable financial forecasts an invaluable service.
Just keep in mind that there is always room to improve, refine and adapt your ability to provide recommendations. The more you solidify a cohesive system for producing accurate and insightful financial forecasts, the more value you’ll provide.
Director, Strategic Development and Engagement, LivePlan
Kathy has spent 25 years in business development, including financial forecasting, strategic planning, process development, project management, and mergers and acquisitions. She has worked in public and private, small to mid-size organizations doing business development, and strategic planning and implementation, working with executives, boards and their investors. Kathy developed the specialized program for Strategic Advisors at LivePlan.