Why Trade Associations Need Financial Forecasting Models

Financial forecasting is the process of estimating a company's future financial performance based on historical data, industry trends and other relevant factors.

Financial forecast models are a valuable tool for planning an organization's future—and can be particularly helpful for trade associations, where leaders have to answer to a board of directors as well as to the wishes of the membership. With this information, you'll have a greater understanding of the organization's financial position and will be able to make more informed operational decisions.

Where forecasting can help

A financial forecasting model should be a compass that your trade association uses to stay ahead. Here's why financial forecasts are crucial:

• Strategic planning: With a financial forecast, your association can set realistic goals, allocate resources and plan for the future. You'll be able to make proactive decisions, identify potential risks and capitalize on opportunities.
• Cash flow management: A financial forecast allows trade associations to manage surpluses, avoid a shortfall, make adjustments and maintain financial stability for long-term success.
• Investor confidence: Investors and stakeholders rely on financial forecasts to determine the health and growth potential of a trade association. A good financial forecast can enhance investor confidence, promote transparency and aid fundraising efforts.
• Operational efficiency: Financial forecasting can give you insights into cost management, revenue projections and resource allocation to help your association improve, streamline and maximize profitability.
• Risk mitigation: A financial forecast model will also help you predict risks and uncertainties in advance so you can mitigate it and develop contingency plans.

How to start financial forecasting

Trade associations of all sizes can forecast major revenues and expenditures. These numbers can provide a baseline from which you can measure the success of programs and initiatives. Based on the purpose of the forecast, determine how far into the future you want to see insights.

There are three steps to building financial forecasting models. These include:

• Gathering quantitative data: In order to project an association's income, cash flow and balance, a forecaster needs to see how fast the association has grown in the past to project how fast it might grow in the future. Past financial statements are the best place to start.
• Drawing on qualitative data: Besides past records, there's other data, including membership and industry data or research, to make projections more accurate. For example, employees inside the organization, such as department heads, might know about internal plans or market trends that will impact future revenue.
• Preparing pro forma statements: Run the numbers and put them in writing in the form of a pro forma statement. To complete this step, you'll need some additional know-how.

Understanding pro forma statements

While a financial forecast is a prediction of what your organization's finances will look like in the future, pro forma statements are how you'll make those predictions concrete. Similar to the financial statement you build your forecast on, pro forma statements should cover three years into the future. There are three key types to include.

• A pro forma income statement should show how much revenue you can expect to bring in and spend over the 3-year forecasting period.
• A pro forma cash flow statement takes the income statement into account and plots out where your association's cash is going. This includes how much cash you'll have on hand at any one time and whether the projected cash flow will be a surplus or a shortfall.
• A pro forma balance sheet uses information from both the income statement and the cash flow statement to project changes in your association's financial accounts over time.

The final and critical step in the financial forecasting process is to go back and record what your organization's actual financials were compared to its forecast. This allows you to create a better, more precise forecast in the future.

Challenges of financial forecasting

Trying to predict the future will always present challenges. Four current challenges you may face include:

• Economic shifts: The economy doesn't always move in predictable ebbs and flows, making it more difficult to determine what the future holds.
• Geopolitical tensions: Global politics can have ripple effects on trade, currencies, market sentiments and your association. Partners, trade restrictions and taxes can all be unpredictable.
• Technological disruptions: While technology is revolutionizing the way we do business, it may evolve faster than your forecast, leaving you trying to keep up.
• Environmental and health crises: In recent years, health and environmental issues have proven that goods and markets are no longer stable, meaning your plan should be nimble.

How to improve accuracy

With the challenges you may face, is it still worth it to create a financial forecast? The short answer is yes. Adopt some best practices to make your model more accurate.

• Plan for the unexpected: Use scenario planning to create multiple versions of your forecast for different hurdles. That way, you'll be prepared for the best-case scenario and for when things don't go your way.
• Embrace technology: Artificial intelligence, machine learning and enterprise resource planning are all great tools to make forecasting easier and more accurate. They can save you time on analyzing data so you can focus on more dynamic tasks.
• Regularly update your forecast: The current economy shifts quickly, which means your data should, too. Analyze data once a month and adjust your predictions so that you're not working from months-old data.
• Strengthen collaborative efforts: Include teams across your association—from marketing to sales—in your information gathering. Your insights will be better with data collected from various teams.
• Integrate external data sources: Look outside your company. What are your industry benchmarks? What's happening globally? Data from external sources will strengthen your forecast.

A road map for success

A financial forecast can show you what direction your trade association is headed in, based on past performance and other factors. From there, you can use that information to anticipate and plan for the future.

By building a financial forecasting model and pro forma statements, a trade association can create a detailed financial plan and operating strategy. With this foundation in place, your organization will be more nimble and resilient in uncertain economic conditions.