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Strategic Advisor Blog

Content, tips and best practice for accountants, CPAs and bookkeepers who offer
Strategic Advising Services to small business clients.

Financial Forecasting: A passion! No, seriously.

[fa icon="calendar"] Thu, Oct 27, 2016 / by Kathy Gregory

Connect the pieces with Financial Forecast

The financial forecast is the heart of any successful strategic advising relationship. Many people falsely assume that reporting is the necessary bit, but the forecast is what provides the roadmap and the basis for the advising. Reports and KPIs do provide information, which inform an updated forecast, but the goal is always to have a rock solid monthly forecast. It’s what provides the roadmap — the strategy, and how you can help your clients make better decisions.

I love building financial forecasts! Truly. Not only is it a means to strategic planning, but the work is fun. It’s one part creativity, one part structure. There’s nothing quite like producing this roadmap for a business based on its historical performance, its needs, and goals; and then adding a dash of hope (or guts, as some would say). All of that together becomes strategy.

(Reality + Needs + Goals) x Vision = Strategy

The creative process makes building a financial forecast very rewarding. You work within a framework of the client’s business plan, but you are also adding your own financial instinct and know-how. Sometimes, your drive can push a business beyond where they thought they could go and also help an owner understand the financial potential in their business.

Here are some fundamental things to always remember when building a financial forecast:

It’s not budgeting!

Budgeting is about setting limits on spending, usually at a granular level. Budgets are also long term, typically yearly or half yearly, and are not meant to be updated based on what is actually occurring in real time. Strategic financial forecasts are meant to be strategic, so they cover broad categories. Forecasts are meant to be updated regularly based on new information about the business.

Communicate with the business owner

In fact, my rule is always: The business owner owns the top line, and I own the expenses. Let the business owner predict and drive their revenue goals, and then you help to ensure the expense side is realistic, using all the historicals as a basis. It’s their forecast, after all — it should reflect their goals. If their goals don’t pencil out, you’ll need to work with them on a version that does, but you have to flesh out their goals with them.

Always have a baseline

Know what they have the ability to do based on historical performance. Know what others in their industry do.  Know industry standards like gross margins, burden rates, and ratios for major expense categories to revenue. For instance, what is the ideal rate for SG&A expenses as a percentage of revenue in their industry? A good forecast is always grounded in reality.

Don’t forget about hidden costs associated with the growth

This is where your expertise from your profession and your intimate knowledge with their books really comes in. Use that expertise and that knowledge together to be sure everything is thought through. If they’ve decided to take on a new revenue stream, be sure you’ve helped them think through all the new types of costs associated with it, and anything that might be unique for their business. Also, be sure you’ve thought about their Resources and Partners. Those always come into play here.

Know when it’s time to update, and when you shouldn’t

This is crucial, and a skill developed over time and with your clients. Know when it’s time to make adjustment to the forecast, versus providing feedback and working with your client to change their process. For instance, if a revenue goal isn’t being met, be sure to work through all the reasons why before deciding it is unrealistic. If gross margins are off, dig into why. That’s where the advising part comes in.

Use the forecast!

Lastly and most importantly, use the forecast!  The forecast should dictate business decisions, not the other way around. It’s not a report about past performance, or even just a baseline to compare actuals against; it’s a plan, and should be used as such.

Complete the puzzle

The work of building a forecast is a lot like putting together a puzzle. You have pieces: some are corner pieces — those great anchors that hold it all together, like contractual obligations or revenue growth. Some are outside edges, the framework you stay within. Others are bright, colorful pieces that mark a unique place in the puzzle, one where you know other parts will be easier to solve once they’re in place, like new revenue streams.

Then there are the mystery pieces, those small, ambiguous pieces that feel hard to place, like an expense that must be paid at a certain time, even though the cash doesn’t seem to be available. You have to wait for more of the puzzle to be built before you can place those, but when you find one, it’s an ah-ha moment: the puzzle comes together!  You are left with a beautiful picture.


  • Build a monthly forecast, for 24 to 36 months (quarterly is fine after 18 months)
  • Start with revenue, forecasting per the business growth plan
  • Add in direct costs to arrive at your ideal gross margin
  • Layer in expenses in order of importance, and/or relative percentage
  • Keep an eye on your ratios of major expense categories to revenue
  • Shift numbers until the ideal net profit is forecasted
  • If financing becomes necessary, model it and layer it in
  • Be sure to remember debt servicing
Kathy Gregory

Written by:
Kathy Gregory

Topics: Financial Modeling & Forecasting , Strategic Advisor Method

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