In my financial consulting practice to small business, I use forecasting as a primary tool in predicting the operations of a business and its cash flows. I have developed my own spreadsheet model that is sufficient for most firms in my market, and therefore can be installed at low cost to them. In my opinion, from long experience, failure to forecast can be one of those things that get business in trouble before they know it and can easily cause business failure.

There are commercial products for forecasting, but I have not found that my clients have wanted to pay for them if something like a spreadsheet could get the job done for them and provide the flexibility of customization to their exact needs. So I think most of these products are used by larger business where the discipline of a vendor provided product outweighs the risk of bugs and errors that can creep into a spreadsheet.

So why forecast; let me count the ways. I have personally shown a number of client companies through forecasting that something bad, such as running out of money, was happening to them without their knowledge. I have also been able to show clients that intended activities would have unexpected or unfavorable outcomes through use of forecasting. This results in a better decision process within the business. Once a firm has experience with forecasting, most decisions wait for a look into the model for the consequences, rather than just using shoot from the hip decisions that can often bring disaster.

A good model requires income statement, balance sheet, cash flow, summaries of expenses and the ability to do buildups of operating expenses, cost of goods sold and the like. It must integrate the historical operations of the company. Finally it must recognize that garbage in and garbage out is still true, so management must commit to doing its best to flush out the best facts to model.

A good model of future operations is quite helpful in financing your business. Your bank and investors will need this information to value your business and its cash flows. So it is time to get started, if you have not. One final comment, if you have never practiced business and financial planning, don't expect to get there on your own. Find a person that is experienced in forecasting and modeling to help you get there. Most home grown models that I have seen do not get the job done and are so inaccruate as to be dangerous.