While some business leaders will say that a focus on financials leads to a focus on short-term goals and hinders the focus of long-term goals and decision making, it might be because those weekly financials meetings are focused on the wrong analytics.
If a business is focused on current income statements with last quarters growth rate used as the determinant factor for growth valuation, then perhaps such short-sightedness would impact long-term goals and revenue growth.
Modern finance theory is based on the idea that the job of managers is to maximize the value of the company, which generally means running the business in the interest of shareholders.
Financial forecasting provides a road map for earning cash flows and a system to evaluate if current strategies are appropriate and effective. This directs attention away from short-term results and towards longer-term strategic objectives.
The implementation of realized growth compared with a forecast range can help managers ascertain assumptions about core business drivers, which can answer questions about long-term product investment and short-term marketing investment.
However, such forecasts should include the following attributes to create the map needed for focusing on financial goals.
Projected Operating Results – which will help to determine the resources needed for the coming 3-5 years.
Industry and Market Growth Predictions – which will place the financial reports in the context of the market overall.
Growth Strategy – which should help to inform the company’s assumptions about how to grow and the resources required.
Growth Rates – which must explain how the company intends to capture the targeted market share.
Action Plan – which informs each department within the company of the steps required to reach targets.
A financial forecast created with these five elements is assumed to be a changeable report that reflects the actual results of the business. While this might seem like a lot of work, and it is, it is more valuable long-term than reviewing quarterly results on a regular basis and using these as the only basis for growth.
These assumptions can be viewed as successful in the following estimates:
Conservative assumptions are met or exceeded with a 75% probability;
a base case is met with a 50% probability,
and aggressive assumptions are met with a 25% probability.
When reporting is presented in this way it captures a bigger picture of the opportunities and risks a business faces. Such financials improve discussions about the potential and direction that a company should take and help to mitigate unnecessary risks.
The focus on financial reporting to achieve long-term goals is not always a popular choice, however, the benefits to your business and the focus on longevity in a fast-evolving marketplace should be a priority when assessing the goals for the health of your business.
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