Financial Analysis and Forecasting: Why They Matter to Your Startup
If you're a startup founder, you know that challenges are part of the process. Here are different ways that financial analysis and forecasting benefit your startup. The post Financial Analysis and Forecasting: Why They Matter to Your Startup first appeared on The Secrets of Entrepreneurship.
If you’re a startup founder, you know that challenges are part of the process. In addition, you know through experience or from the stories shared by other business founders that finances and poor planning are common startup challenges. Thus, to increase the chances of success of your startup, you need to address these challenges effectively. Financial analysis and forecasting are crucial areas that deserve your attention.
While financial forecasting looks into future final projections, financial analysis reviews historical data and trends to help business owners make impactful future decisions. Whereas these activities are critical, they’re often not executed as required due to their tedious nature when done manually. Finance staff often need to examine vast amounts of data and prepare numerous financial reports. This makes financial analysis and forecasting a tiring and time-consuming process.
Despite these hurdles, the essential role of financial analysis and forecasting in your startup cannot be overemphasized. This calls for more innovative ways of handling financial data to help better decision-making. Today, you can reduce the time and resources spent to consolidate and analyze financial data through a financial consolidation tool.
Here are different ways that financial analysis and forecasting benefit your startup:
Improved Business Liquidity
Although ‘cash in king’ might be cliché, it’s for a good reason. A good liquidity ratio enables your startup to meet all its short-term financial obligations and improves your creditworthiness. Besides, your startup’s liquidity affects financial stability. Hence, the ability to meet short-term obligations, like wages and salaries, raw materials purchases, rent, and utilities, among others, is critical to your startup’s sustainability. These obligations require cash.
Financial analysis can help expose all areas that may increase your solvency challenges, enabling you to take prompt action to forestall them. For instance, a growing accounts receivable book may indicate slackening in your credit control and debt collection department.
Budgeting enables your startup to stay on track by ensuring that the most significant chunk of your business finances is only allocated to cost centres that propel your vision and its strategic objectives. A reasonable budget enables you to cater to anticipated expenses while forecasting possible changes in different cost centres occasioned by external circumstances. Moreover, a good budget can help you realize your business goals.
Financial analysis and forecasting enable accurate examination of valuable data in your different operational centres to produce different reports. These reports could include your balance sheet, income statement, and cash flow statement. When these reports are consolidated, they help generate a periodical budget.
When carried out accurately, financial analysis can help you and your team to make solid business decisions that drive your startup to the future you’ve envisioned. For example, your balance sheet may indicate a need to reduce capital expenditure. At the same time, an income statement may speak to the importance of increasing funding for sales and marketing activities.
Internal and external threats are a constant feature in the entrepreneurship journey. Your ability to keep such risks at bay is crucial for your startup’s continuity and financial stability. Financial reports can help you identify possible risk areas, enabling actions to mitigate such threats to your business.
For instance, your reports may indicate your capital-intensive assets as your main growth drivers while pointing to the low insurance premiums paid for them. This would imply that in the event of damage or loss, you might not receive adequate compensation for your equipment and machinery.
Further, when considering scaling up using borrowed interest-based funds, financial analysis and forecasting can enable you to identify your ability to repay on time. The various consolidated financial reports can help you cap your borrowing to that which is manageable by your startup to avoid being backlisted and, at worst, an insolvency suit.
Financial analysis can also expose gaps that help you revamp your startup’s risk management strategies.
Although financial analysis and forecasting are essential for your startup’s financial health, the manual processes involved are tedious and time-consuming. These can impact the quality of financial reports generated, which affects the quality of business decisions. The direction and wellness of your startup can easily take a hit because your team depends on these reports to make critical decisions.
An innovative financial consolidation tool can positively impact your startup’s growth by promptly exposing any financial issue. You can also make better business decisions backed by more accurate and relevant data. In addition, a financial consolidation tool helps reduce the time and monetary resources spent to consolidate and analyze financial data manually. The savings can be redirected to other important business tasks, improving overall performance.
Furthermore, automating your financial planning and analysis is a safe way to safeguard your startup’s financial wellness.