How did we use financial forecasting?

At my last company, as COO and later CEO part of my responsibility was overall financial management.  Early on, we were thinking about moving into a larger office.  The costs would have been substantially greater than what we were paying at the time, so our ability to pay for the space going forward was a concern. When we started talking about what our future revenues and cash flow looked like, I didn’t have a good answer.  We were a consulting firm with contracts extending out into the future for 1-6 months.  We had multiple contracts, all at different rates and costs.  Some were hourly, and some were projects with milestones attached to payments. So while figuring out our future revenues and cash flow was not simple, it was certainly not impossible.

That night, being the Excel geek that I am, I went home and spent all weekend building the first version of our financial forecasting tool.  It turned out to be incredibly beneficial in making the decision whether or not to move.  We didn’t move at that point, but now had a way to see when our revenue would support it.  Over time, I enhanced it to add cash flow forecasting, different types of projects, deals that were very close to closing, and some one time modifications to support different scenarios we were considering.  The tool was built in Excel, using multiple Excel workbooks, various look-ups and formulas and VBA macros.  It was fragile and temperamental, but hugely useful.

We reviewed our forecast often.  Certainly every time we had a financial decision, but the more we used it, the more we saw what a great indication of our financial health it was.  First of all, we could see points in the future when we had a big contract or multiple small projects ending at the same time, and focus on our marketing and selling to smooth out that “boom/bust” curve.  We were also able to see which projects and which customers were more or less profitable, and put our focus on similar projects.  Similarly, we were able to see where there were opportunities to improve our margins.  The more we used the forecasting tool, the more we valued it.  Traditional financials like Profit and Loss or Income statements tell you what happened in the past.  Our forecasting tools were able to tell us what was likely to happen in the future if nothing changed, and more importantly, it let us effect changes that changed our future.

I’m always curious about how others view financial forecasting, and how they use the results of a forecast.  I’d love to hear about your thoughts and experiences below.

I’ve spoken with many small business owners about this tool and found they, too, could benefit from this tool. So I decided to write the tool in a more sustainable platform and market it to small service-based businesses. If you think this may help you, stay tuned. We’ll be looking for beta testers soon.

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