In finance, if your budget is your map then your financial statements are your GPS coordinates and your forecast is your compass. Your forecast tells you where you are heading and should inform management decisions. The forecast answers the question “if we keep going the way we are, what will be our total sales, our salary expense and our closing bank balance for the year?”
While forecasts are not perfect, they can allow management to alter course. Many founders have been able to act quickly to changing conditions as a result of exceptional forecasting clarity. Having a 6 months heads’ up on a cash crunch can mean the difference between life and death for a small company. If sales aren’t quite going as well as expected, it can help the CEO communicate to managers about delaying hires or purchases. If the forecast is favourable, the business may be able to advance their plans.
On at least a monthly basis, management should review the forecast and find areas for improvement of execution of the plan. On at least a quarterly basis, management should examine the forecast and determine if a change of plan is required.