A CFO creating a financial forecast report

How to Create a Financial Forecast with Your CFO

Financial forecasting is an essential practice, but navigating the waters of financial planning can be daunting, especially when you’re considering bringing a fractional CFO on board for the first time. When done correctly, the process of creating a financial forecast is just as useful for improving fiscal robustness as having and using the forecast. It’s about striking the right balance between vision and pragmatism, between detail and big-picture thinking. 

What is a Financial Forecast?

A financial forecast is a comprehensive projection of a company’s future financial health based on historical data, current market trends, and expected future events. It’s an essential tool for strategic planning, resource allocation, and investment decisions.  Updating forecasts monthly is considered best practice.

How to Make a Financial Forecast

A good CFO will lead the process in a professional and timely manner. When done correctly, you just need to sit back, answer their questions, and listen to their findings. Here is the process for how to create a financial forecast:

  1. Work with a reputable professional or agency. Start by engaging a well-established CFO or Fractional CFO firm with a track record of creating accurate, insightful financial forecasts. 
  2. Initial Deep-Dive Session: Your CFO will host a 1-2 hour deep-dive session to learn about your business. You should do most of the talking as they listen, ask clarifying questions, and take notes. Lay out your vision, challenges, and nuances of your operations. The CFO will likely categorize your input into the following modeling buckets:
    1. Revenue
    2. Headcount
    3. Costs/inventory
    4. Operating expenses
    5. Working capital
    6. Fixed Assets
    7. Capital and financing
  3. Modeling. Your CFO and their team of analysts will work on modeling while you focus on other business priorities. You should expect them to check in at least one time during modeling to ask follow up questions and show you how the model is evolving.
  4. Final forecast review. Once the model is near completion, work closely with your CFO to fine-tune assumptions and grasp the implications of the forecast. Your CFO should already have an insightful interpretation of the results along with strategic guidance.

 Maximizing Benefits of Financial Forecasting

Since forecasting is a big undertaking, you understandably want to get the most out of the project. Besides simply knowing how to create a financial forecast, there are several initiatives you can take to improve the outcome of financial forecsting.

Tell The CFO Everything

You are the expert in your business, so do not hold back. The initial phase is where you do most of the talking. It’s imperative that the CFO listens intently to grasp the intricacies of your business – not just the business mechanics but also your goals and concerns. This ensures their analysis includes risks you are focused on.

Define Your Involvement

Some business owners just want the bottom-line, others feel most confident once they know exactly how to prepare a financial forecast themselves. How much involvement do you want? Your CFO will customize their approach to match your expectations.

Avoid Over-Simplification and Over-Complexity

If you feel overwhelmed by the complexity of your business, may think more details are better. However, modeling every nuance increases the risk of major undetected errors. Furthermore, excessive detail can make modeling less accurate, not more accurate. 

You should feel concerned if your CFO builds an overly simple model, especially for revenue, headcount, and inventory projections. These three areas deserve more time and focus than a simple “increase 10% per month” kind of assumption. 

Strategic Insights from Building a Forecast

Financial forecasting is not useful if you gain no knowledge. Your CFO should provide valuable strategic insights immediately upon completing your forecast. I once build a forecast for a small business owner who reluctantly resigned herself to raise $1M to grow her company. She was delighted to learn we had found a growth trajectory which could be safely achieved without raising a penny. 

Another time we worked with a business owner who was terrified about what would happen to this adjustable-rate loan once the federal reserve raised rates. He was spending lots of time meeting with banks trying to refinance the debt. The forecast revealed he would save 5x more money if he spent the same amount of time training his employees to avoid making costly errors.

Forecasting is a non-stop process

Knowing how to create a financial forecast is hard, and neglecting a financial forecast is easy. At CFOshare we update forecasts and meet with executive teams monthly, at minimum, to provide timely insight and anticipate risks. That may feel excessive to those who are not used to forecasting regularly but remember: a boring forecast review meeting is a good thing! That means you are fully anticipating business challenges. 

Crafting a financial forecast with a CFO is an investment in your business’s future. It brings clarity, uncovers hidden risks, and sets a path for growth. By understanding the process, actively participating, and setting clear expectations, you can ensure that this collaboration turns into a powerful tool for your business’s success.

Looking for an outsourced CFO to help with forecasting? Contact us to learn how our fractional CFO services may improve your business forecasting process.

This article was written by a CFOshare employee with assistance from generative AI for rhetoric, grammar, and editing. The ideas presented are a combination of the author’s expertise, original ideas, and industry best practices.

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