Forecasting – the ability to foresee the future, analyse trends and make even semi-accurate predictions allows the entrepreneur to be proactive when tackling industries and making business decisions. This maximizes the entrepreneur’s ability to ‘make hay while the sun shines’. Forecasting is a key entrepreneurial skill, and a powerful tool in financial models.
According to CFI, financial forecasting is “the art of building a prediction in Excel of how a company will perform in the future.”
Conversely, the inability to foresee trends is what has led to the collapse of listed, multi-billion Dollar companies. Companies who failed to foresee the digital revolution come to mind. These companies were unable to predict that their markets were changing. Once it became evident they were simply too late to adapt to the new trends such as digital cameras or the internet.
Forecasting is also an essential model input, and modelling is something we are rather passionate about! Every good financial model has a forecast of 10-20 years. Inherent in these forecasts are trends – will consumers still be using our product? Will this usage grow? How will technological innovations affect the usage of our products?
An entrepreneur is keenly aware of these questions. They spend time honing their forecasting skills and continuously updating their business and financial models to ensure they capture the latest trends. This also improves the accuracy of the forecast going forward.
So forecasting is a key element and can define your life as an entrepreneur. The ability to forecast well and see where markets are moving will allow you to grab opportunities before they are evident to your competitors and take the first-mover advantage.
Still not sure why you need a financial model? Then read Why Financial Models Matter.
Good luck and happy financial modelling!