Avoid these 4 common financial forecasting mistakes

January 18, 2023 1:20 PM

A business's financial forecast is a vital tool as company leaders plan for future opportunities and roadblocks. An accurate forecast can help businesses take advantage of good times and weather storms that come their way, such as the economic difficulties that arose from the COVID-19 pandemic and continue to plague businesses today.

Financial forecasting plays a pivotal role in the success of your business. That is why it is important to avoid missteps in creating this vital report. Here are four common business forecasting mistakes that may be encountered when building a financial forecast.

Being too optimistic or pessimistic

Razvan Chisu/nullplus - stock.adobe.com

Hopefully, a business's financial forecast is not all doom and gloom. However, it should not paint an overly rosy picture either.

Avoiding bias in a financial forecast is essential so executives have the best information to support their strategic planning. The best way to avoid bias when creating a financial report is to have accurate information to draw from. Consistent, correct data gathered over time enables CPAs to track a company's KPIs, compare past projections and make educated forecasts for the future.

Working with old data

abcmedia - Fotolia

CPAs have remarkable data gathering and processing tools at their disposal, and it's critical they be put to use for an accurate financial forecast. Using old, static data to build a financial forecast will miss crucial information, and the result will be an unreliable forecast.

Today, data is a living organism, constantly updating and growing. This massive amount of data should be a benefit for CPAs, as they have more to work with to create a financial forecast. Just as having more pixels creates a better picture on a television, more data creates a more complete financial portrait. Gathering real-time information allows CPAs to build a more dynamic forecast that is a strong building block as companies plan for the future.

Using manual processes

Manual data entry should be a thing of the past, not just because it is tedious and time-consuming. Manually inputting data makes it far easier for human error to impact the financial forecast and lead to poor results that a business cannot rely on for planning. Accurate numbers are essential when determining budgets, making cost-cutting moves, and creating strategies to increase revenue. Small errors made at the start when inputting data can have a cascading effect that produces skewed analysis.

Remove the potential for human mistakes by using automated processes to gather, input and sort through data. Robotic process automation can take on a variety of tasks and processes that not only speed up forecasting but drastically reduce errors as well.

Getting too detailed

alphaspirit - Fotolia

An easy mistake to make when creating a financial forecast is giving too much detail. Though it can be tempting to give executives a firehose of information, executives only need a refreshing glass of water from the forecast.

There is more data than ever for companies to analyze, so it may seem unwise not to use as much data as possible. However, in the case of a financial forecast, less is often more. Presenting too much data runs the risk of creating a confusing report that gets pushed aside instead of being fully digested and incorporated into the company's planning.

CPAs must identify which data is necessary to provide an insightful forecast and deliver their analysis in a way that executives can understand and utilize. With accurate information in hand, accountants can show the C-suite the big picture and present the information in an easy-to-understand format to ensure it hits home. Simplify the data being presented and present it in a more visually appealing format to give executives a useful financial forecast.

Avoiding these common mistakes ensures CPAs provide the best information and analysis to their clients. Executives with an accurate financial forecast in their tool belts will be able to make strategic plans for their business to grow and thrive.