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Build a Better Business Forecast

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Man brainstorming on business plan

Think positive, and think negative.

It’s been proven that optimistic people tend to live longer than pessimistic people, and many studies have shown that optimists tend to earn more over their lifetimes. Interestingly, one study showed that, while most successful business leaders think of themselves as optimists, optimistic business leaders earn 30% less than pessimistic ones on average. 

Against the backdrop of the past 10+ years being a relatively solid U.S. economy, it’s especially easy for optimists to get lulled into the trap of thinking the business environment will always be better than average. Of course, it won’t be; eventually, there will be rough patches. Therefore, we encourage you to ‘think negative’ while also thinking positively about the future. Both kinds of thinking will impact your forecasting directly. 


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Building a ‘better business forecast’ goes beyond just doing new quarterly sales goals and budgets each year. A “real” forecast, preferably with a 3-5 year time horizon, is where the smart entrepreneur thinks – negatively and positively – about the risks of something going wrong (pessimism) and maps out contingencies to come out ahead (optimism): 

  • What if the economy shifts significantly over the next 5 years?
  • How can you deal with losing a key supplier or customer?
  • Who are your most valuable Clients and what if you lost the top two Clients?
  • Which Clients should you cut if resources become limited?
  • How much capital do you need to invest now in growth, so the business will be valued at an acceptable multiple 5 years later (even in a tougher economy)?
  • In which area should that capital be invested?

In other words, establish how flexible the organization’s financials are, before you are forced to find out. 

This is when forecasting gets a lot harder because there are a lot more variables to consider; and it’s why you need a full financial model to build the right what-if scenarios. Therefore, you need a business forecasting tool that’s flexible and comprehensive, which provides analytics on product profitability, the cost of working capital, optimal capital structures, sustainable growth rates, and how all those variables affect enterprise value.

Once a base case forecast is created, the model should be able to run any set of scenarios, against which to identify the likely impact. Test upside limits and downside risks; and see what would happen in a downturn. Since the stakes are significant, forecasting isn’t necessarily for the faint of heart. You need to be careful because making a small mistake on one assumption now could mean a huge gap in 5-10 years. In other words…

“You may not want to try this at home”
Some would say that building your own forecast model is like being your own attorney. So get some help and other opinions. And keep in mind there’s no need to sign up for big fees to build a model and full analysis. Research your options carefully.

Business bankers aren’t all the same.
You need insights into running your business better. Your accountant and lawyer will certainly help and consider leveraging the insight and wisdom of your banker (if she or he has the right mindset). In generations past, bankers used to serve as close and trusted financial partners. They had an interest in their Client’s success, and they had the experience to guide wise decisions. Today, unfortunately, many “big bank” bankers are little more than human credit scorers, plugging information into a system that spits out predictable answers. They don’t take the time to listen to their Clients’ vision, analyze their options, and offer insightful solutions. True banking partners are a rare breed these days, but they do still exist. 


Learn more about getting started with a customized, no-cost financial analysis and model for sustainable growth.

Learn More


 

To learn more about our Horizon Analytics methodology and hear from our Clients how they’ve found it to be a true difference-maker, click here

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Pacific Mercantile Bank

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