Finding the right number of “what if” scenarios in order to identify enough possibilities of what is going to happen is what business forecasting is all about. Many business owners mistake it as a way of knowing for certain what will happen in the future. That’s never going to happen, of course, because no one can predict the future. There are innumerable variables to consider that could throw off even the most sophisticated forecast.
When creating the best possible forecast, the Chief Financial Officer has the task of identifying the top seven (or so) most likely scenarios and doing a full “what if “ analysis on each of those scenarios. Included in the seven scenarios should be a best case and worst case. The tool to figure those out is one that has together in one a Profit and Loss, a balance sheet, cash flow, inventory plan and sales forecast. As long as they’re adaptable to retail, manufacturing, distribution or services (depending upon what type of business) schedules can be broken down by quarter, month or even by week. Key metrics and where the risks and opportunities are also need to be included in the model (the great thing about which is whenever a number changes anywhere in this model, all the other numbers adjust).
This type of model is a tool Next Step CFO uses in business forecasting as a part of its CFO Services. This model shows a wide range of scenarios to the business owner, along with all the risks and opportunities associated with those scenarios. When a business owner is provided with all the information a Next Step CFO business forecast gives them, they have the knowledge they need to make their decision making process much more thorough than a business owner who makes a sloppy or lazy forecast, or a business owner who forgoes creating a business forecast altogether. The more thorough the decision making process, the more reduced risk to the business owner will be, so every business owner needs to recognize the importance of Business Forecasting.