In last week’s episode, David and Eric talked about ROA and ROA and why it’s important to grow your margin, but not at the expense of ROA. In today’s episode David and Eric discuss Financial Forecasting. While many seek a tool to help them see into the future, we believe this is a tool that should help you create the future. Let’s go into the future proactively and purposefully.

The first priority is discussing why Financial Forecasting is important. We can’t get stuck on the past and then assume that the past will be the predictor of the future. While it is certainly a good indicator- looking in the rear view mirror all the time is not the best way to run your business. You must think forward. If you’re planning to scale, your financial forecast does not guarantee that you will get there, but it does show that there is a way to get there. At least half of the value that comes from a financial forecast is created as the forecast is built. The disciplined process of maturing and being able to articulate every area of the business model often creates more value than the end product itself.

No matter how far out you make projections for the future, nothing ever happens the way we anticipate it. Being able to build scenarios and make adjustments is very important as the world changes.

There are three major components to the financial forecast for identifying all the key variables that drive changes in the business model: the income statement, the balance sheet and, the cash flow statement of the company. Without these – you’re missing many components that reveal the real value of this process in the model. You are going to need to understand and articulate not only the future profitability of the business, but its future cash flows and returns to investors.

To summarize these key components: when talking about the impact on the income statement, you start with revenue and breaking that down to units, pricing, and the sensitivities. At this point you’ll really start to generate amazing value beyond probably 90% of the financial models out there. Listen to this episode to get all of this in detail and more.