There are four types of forecasts that we produce, each serving distinctive purposes, taking unique approaches to produce. and focusing on different elements.
The four include: Bank or public financing forecasts, forecasts for private investors, valuation forecasts and internal company forecasts.
Bank forecasts tend to be the quickest to produce for a couple of reasons. They are one component of a larger business plan, the P & L tends to be the main focus, and they are not created for ongoing use. As a result, basic metrics are usually enough to support the numbers. These forecasts serve the purpose as a sales tool, and partially as a factual document. I say the latter because it is, after all, a forecast so you can follow the sales element, be somewhat aggressive in that, but sell it off as conservative with a few solid supporting metrics. With these forecasts the P & L seems to be the main focus, with cash-flow after that and then the balance sheet. For whatever the reason, the latter two rarely get questioned.
Investor forecasts require many of the same aspects as the bank forecasts, but with greater focus on cash-flow and specific ratios such as pay-back, runway and burn rate. A detailed cash-flow typically takes more time to produce and the accuracy of the balance sheet is of more importance. Here the business plan is also part of the package, but the focus there even differs from the what the bank looks at. In this case, the forecasts is very much a selling tool, and most investors expect that and will vet more thoroughly, not just the support for the numbers, but what you personally bring to the table, then banks do. In this case, you also need supporting metrics, more then with banks, to attract potential investors.
In respect to valuation, the forecast stands alone, without a business plan. It serves the very important purpose of valuing a company for any number of reasons, such as corporate restructuring, bringing on new shareholders or selling the business. For these purposes we will assume the latter, since that is a growing segment of valuations. Although these can be largely focused on past performance, they also require a component for future performance, whether it be a simple cash-flow forecast or a discounted cash-flow forecast. This really is a sales tool, more then the previous two because indicating results with limited growth and survivability are not enough. It must indicate that a real reward is available for the buyer. A similar focus on metrics is also important and a similar amount of time taken to produce both the investor and valuation forecasts.
Now for the internal financial forecasts we create (Not the dirty or departmental ones I mention in an earlier post). These serve an entirely different purpose then the other three. Accuracy, flexibility, user friendliness for ongoing use, and a high degree of metrics use are necessary. Anything that drives revenues and expenses must be included with the ability to easily change when required. In addition, it must be measurable on an ongoing basis. This is not a sales tool, and unlike the other three, a simple excel or google sheet spreadsheet will not suffice. This is a tool that can be used to assist in evaluating scenarios and to provide a reasonable ability to ensure that the ensuing strategy will bring predictable results. These forecasts will include macros, menus, look up tables, and possibly python and/or even agentic AI, amongst other modifications. Although it takes a longer amount of time to develop, implement and test, the result is a tool that is easy and quick to use once complete, thereby eliminating another issue companies often have, a tendency to get shelved because they are too onerous and time-consuming to use. These are invaluable to a company.