Here is our rundown of the 11 biggest forecasting mistakes people make when working on their financial projections.
1. Treating Forecasts As If They Are Static ⚠️
Forecasts are dynamic! We’ll say it louder for the people in the back; forecasts are dynamic! So many founders we have worked with think that their forecasts are a line in the sand. Once it’s finished, they head off to raise finance with it, but this is where they go oh-so-wrong. The market is not static, your business is not static, so why should your forecasts be static? Make sure when you build your forecasts that you’re prepared for them to change. If you’re worried about constantly adjusting your numbers, try online financial forecasting software like Numberslides. We make toggling numbers really easy.
2. Treating Business Plans As If They Are Static 🛑
If you take a business plan and assume nothing will change, you set yourself up for all kinds of problems down the line. Suppliers’ prices change, your customers will give you feedback, and the market will shrink or grow. Your business plan must be prepared to adapt to these changes. Your financial projections must work hand-in-hand with your business strategy. Don’t make the mistake of creating rigid business plans and inflexible budgets; the world is always moving, so be prepared to go with the flow.
3. Confusing Profit and Loss Statements with Cash Flow Forecasts 💸
We’ve written about the difference between cash flow forecasts and financial forecasts because this is something that regularly get people confused. This is one of the biggest forecasting mistakes founders regularly make. It’s really important that you’re able to understand the difference. Cash flow forecasts track money coming in and out of your business. Financial forecasts typically refer to a 3-part collection of documents; the cash flow forecast, the company’s income statement, and the balance sheet. Confusing cash flow forecasts with financial statements often results in founders failing to understand what a great tool cash flow forecasts can be.
4. Focusing on Profits and Ignoring Cash Flow 🧮
Many founders fail to extrapolate their numbers past expected profits. As a result, the cash flow forecasts are overlooked, and these are a fundamental tool to understanding your financial status. When you take the time to map out your cash flow projections for the foreseeable future, you will be able to identify and plan for periods of cash shortages. Most businesses will encounter them in some form or another and its vital you’re prepared to handle them when they hit. Cash flow is vital to your business. For example, you can use your cash flow projections to identify months where your growth may be forced to pause as you cover your basic costs.
Investors value cash flow forecasts (we’ve explored the 8 actions you need to take to secure an investor here) and as a business owner, you will too.
5. Creating Generic Forecasts for All Audiences 📢
Your financial forecasts need to deliver different levels of detail to each member of your audience. As the business owner, you should be able to understand it all; what cash is coming and going, where your profits are coming from, how much of your product you plan on selling…the list goes on.
Your forecasts mean different things to different people. For clients, your forecasts are all about profits. If they’re taking a chance on you and trusting that you will provide a certain service or product, they want to make sure you’re set to make profits enough to fulfil your obligations to them. For investors, their interests lie in your cash flow as well as your profits. They will need a much more granular insight into your business.
Make sure your build forecasts that are appropriate for each audience.
6. Providing Far Too Much Detail 📚
Following on from the previous point, try to find the sweet spot of the right amount of information. A finger in the air or a memo with a few scrawled numbers lack statistics to support your claims and is far too high-level. Conversely, noting expenditure down the last paper clip (believe us, we’ve seen it), may be useful to you, but actually is overkill for most investors. Going too deep into your numbers is one of the biggest forecasting mistakes you can make.
If you’re unsure about how much detail you should include, try Numberslides to see the different data we ask for when populating your financial forecasts. The numbers that you are required to fill in are a good indicator of the sort of detail you must provide.
7. Omitting Market Data 📡
Your business plan and financial forecasts may look excellent on paper, but dropping it into the thick of the market may put all your projections out of place. Make sure you get all the data you need when building your financial market. This starts with Google research and should lead you to discover people who are actually operating in the market. Talk to them. Ask for help. Many founders adopt an attitude of self-reliance, which can only get you so far. Watching founders do things in silos is painful, especially when market context then invalidates a lot of what they’ve projected.
Use Numberslides to make critical assumptions on the market and how your business will perform within it.
8. Not Knowing How Much Funding They Want 💵
You’ve drawn up your business plan, you’ve worked out your financial projections, and even done your cash flow forecasts. The next thing to figure out is, how much money do you want? Asking an investor for £200k “as an investment in your business” isn’t enough to bag the cash. You’ve got to work out where you need cash, and how much you expect you’ll need. Look at your revenue and costs, take into account your cash flow, and come up with a number that’s specific to your needs.
9. Relying on Advisors 🦜
Founders and business owners often approach advisors for help with their financial projections. Whilst financial advisors can be extremely helpful, their input is often short-lived. After a thorough investigation into your numbers, they deliver a single model for your business. As good as this may look, without the context of the market and the flexibility to move with the market, these financial projections have their limitations.
As soon as founders take this set model to a bank to enquire after a loan, or to the investor community to enquire after funding, they risk losing credibility. Why? Because financial advisors build (excellent) models for unique purposes, such as applying for a loan. Financial models that don’t answer questions that audiences are asking, will make most founders look underprepared and a bit clueless.
Regardless of how good the advisor may be, or how effective the Excel template or financial model, the results are often not a bespoke and flexible collection of forecasts.
10. Falling Into the Black Hole That Is Excel 🕳️
Whilst we love Excel (we’re accountants and lawyers by trade, so we really mean it when we say it), we also are aware that it can present challenges.
Excel is a software program. It is designed to be used for data management and manipulation. Excel allows users to understand trends, costs, volumes, and all kinds of statistics and outcomes. Yet most people just see Excel as a place to dump some static numbers.
Excel is not a fancy word document. Far from it. We’ve frequently seen ‘models’ created by start-up and business owners, which equate to nothing more than a list of numbers in a column.
Investors expect spreadsheets that are functional and that speak when spoken to. They will often query the numbers and want to edit inputs, like predicted revenue, or costs; perhaps the services or suppliers’ fees.
Once a founder starts using Excel as a listing platform, it becomes a little tricky to evolve the mode into something more substantial. The other end of the spectrum, of course, is a spreadsheet that’s so diligently created, it takes a while before investors can unlock certain aspects and make their necessary tests.
Don’t fall into the black hole that is Excel.
11. Making Your Financial Forecasts Indigestible 🍝
Make sure your financial forecasts are digestible. If it’s indigestible it’s inaccessible. Remember the previous point about Excel? With hardcoded numbers, your data is safer. It’s easier to read and manipulate. However, if you’re not sure how to populate this, turn to an advisor, or better, try Numberslides. If you can give all your investors exactly the same model, correctly formatted, with clear consistency in your numbers and style, you give your investors the best possible chance to correctly interpret your forecasts. Avoid fancy formats, weird highlighted sections, and butchered tables. Focus on a clean, easy-to-read look that gives your investors the best chance to learn about your projections.
Use Numberslides to Build Your Financial Forecasts
Skip the mayhem caused by Excel malfunctions. Save time and avoid repeatedly requesting advisors to update your model to satisfy each new investor’s inquiry. With Numberslides, you can create your own financial forecasts, quickly, easily, and with support and guidance each step of the way. Our online software stores all the data that you input, and walks you through all the numbers you must include. Once you’ve put your data in, you can populate your forecasts and analyse them against the market. Our market data is live and offers a critical sensitivity analysis to give your business the best chance of success.