Businesses have to cover a lot of ground to achieve financial success in this competitive era. With global economies fluctuating and altering the scenario, taking a closer look at your business performance is essential to stay ahead.
If you want to assess how your business might perform under various circumstances, you must gain a wider perspective.
And this is where three-way financial forecasting comes in. The process combines three crucial financial reports – cash flow, balance sheet, and P&L (profit and loss statement).
This 3-way, integrated financial modeling enables you to gauge the financial health of your business. So, you can stay prepared with better financial strategies and models to withstand different situations.
The article will talk all about the process and its benefits.
What is the 3-Way Forecast Modeling?
This financial modeling process helps forecast balance sheets and cash flow, along with your company's profit and loss. So, you can view the impact of your financial decisions on your business performance.
Understanding the future impacts will help you realize whether a positive or negative decision and modify it accordingly.
The process is used by companies all over the world to predict their cash position in the near future. In addition, they also understand whether they will be able to achieve their financial objectives successfully.
- The forecast lets you take a closer look at your decisions
- You develop a better understanding of the current market scenario and what you need to do
- It provides you with valuable insights on your business expenditure trading and investment
You can also evaluate your cash flows, outflows, losses, assets, liabilities, and equity. Therefore, it provides a clear picture of all the financial elements that determine growth and success.
How 3-Way Integrated Financial Modeling Helps Businesses
The 3-way financial forecasting model is vital for gaining a competitive advantage. If you want to increase your revenue and refine sources of income, you have to implement this process.
Let's look at its benefits in boosting organizational performance.
Enhanced Decision Making
As this process is based on accurate financial data, there is no room for guesswork and errors. It's because your financial analysts will implement this method by fetching real-time data of cash flow, balance sheets, and P&L statements.
- You can easily derive insights from this forecasting model results by utilizing sophisticated financial analysis tools.
- Then, you can analyze your currently implemented financial strategies and decisions. You'll understand what is working and what's not.
- As everything is based on real-time data, you can conveniently approach your investors and banks for support. The forecasts will help you explain your business prospects.
And all this will massively improve the quality of your decision-making.
As this process allows you to understand your future financial performance better, you can prepare yourself. By altering some decisions and restructuring your budget, you can set yourself up for profit.
- It enables you to channelize your cash to various projects and tasks efficiently
- As per the forecast, you can establish weekly, monthly, and yearly budgets
- With more control over your cash flow, you can temporarily halt projects with poor ROI
- You can optimize income streams and outflow sources for more profit
If you manage to stay within your budget, you can increase your savings and invest wisely.
Analyze Feasibility of New Ventures
By combining all the crucial financial elements of your organization, you can evaluate your business strategies.
- For instance, you might plan to invest in a new project. Here, combining the forecasting results along with your project expenses, you can analyze its success.
- By predicting the projected turnover and expenditure, you'll understand whether the project meets your business goals.
- Based on the information, you can modify the project expenses and even discard the idea.
So, this way, the 3-way forecasting method lets you explore newer ideas and possibilities. With a broader understanding of your finances, you can start profitable ventures more accurately.
Financial Risk Assessment
When you can look into the future, you'll make better moves! With the 3-way financial forecasting by your side, you can avoid financial risks and setbacks.
You can understand which processes might fail by delving deep into your P&L statement, cash flow, and balance sheet. As you focus on the cash-consuming financial operations or the sources of loss, you can mitigate them beforehand.
- Suppose you have initiated a project. After analyzing its expenses, you find that your cash outflow will be more than your inflow.
- In addition, the project might also increase your liabilities, inching towards debt. So, you can make necessary changes to avoid any financial issues in the future.
It also impacts your decision-making, as you need to modify specific strategies to avert financial risks.
Evaluating Your Business Model
Your business or financial model is the set of strategies that help you make money. That's why it's essential that the model is aligned with your objectives and creates profitable sources of income.
- 3-way financial forecasting enables you to evaluate your current business model and its performance over time.
- This tool can help you understand if the model will be profitable within a specific period.
- Gauging its ROI, you can modify the inner processes, hire new employees and take necessary actions.
The best advantage of this forecasting method is examining a financial model before applying it to the real world. It helps your financial team and other departments align other projects according to the most efficient business model.
How Can Technology Help?
You can use organizational software to perform this 3-way financial forecasting more efficiently.
For example, StrategyX offers integrated dashboards that provide you with a clear picture of the various processes within the organization, including finance and human resources.
You can systematically handle all your accounts and portfolios with this software. It will help in deriving appropriate financial data.
Also, while evaluating your business model, you can use the Risk module of StrategyX to identify, monitor, and manage risks. It is the perfect strategy planning tool offering a project management framework, which immensely aids your financial planning.
Whether you are a seasoned professional or just starting, you need to keep your finances in check. So, 3-way forecast modeling is one of the most valuable strategies for achieving your financial goals.
By analyzing cash flow, P&L, and balance sheet, you can take your business performance to the next level.