The Importance Of A 3-Way Forecast In Business And Its Benefits
A 3-Way Forecast in business is sometimes referred to as the 3 Financial Statements or 3 statement financial model. It combines the three key financial reports into one consolidated, and dynamic, forecast. By combining the cash flow statement, profit and loss statement, and the balance sheet, it demonstrates your accounting integrity. Download these free templates below:
Let’s take a closer look at the importance of the 3-Way Forecast in business
- When do you need a 3-Way Forecast in business?
- How should you prepare a 3-Way Forecast in business?
- Choose specialised 3-Way Forecasting software
Traditionally seen as challenging to achieve a dynamic spreadsheet, tools like Brixx exist to automate the processes and do the heavy lifting. Brixx even has you covered with a free guide to the 3-Way Forecast in business.
When do you need a 3-Way Forecast in business?
A 3-Way Forecast is important for your company. It helps to highlight future financial scenarios that enable you to ensure you can afford to pay your suppliers and employees. It consolidates the three key reports to help the business in a multitude of scenarios.
Because it links your Cash Flow Statement, Profit and Loss Statement, and Balance Sheet, the 3-Way Forecast helps you forecast future financial health and cash position. This forecast is driven by real-time data in these three reports and adds value when it comes to seeking financial support from investors or banks. By being able to explain the future prospects of the business model to potential partners and lenders, the 3-Way Forecast should not be overlooked.
It not only allows you and your management to feel confident about your cash position but it is key when looking to bring financial stability to your company in the future, as well as at present.
Whether you are looking to raise capital, conduct a board review, execute annual strategies, apply for bank loans, or more, effective budgeting and cash flow forecasting can mean the difference between your company’s success or failure. It is key to know where you stand financially at any given point in time. This will enable you to plan ahead for multiple scenarios.
A well-created 3-Way Forecast in business can assist you in decision-making. It can help you build out models based on key business drivers, surface KPIs, and loan covenants.
How should you prepare a 3-Way Forecast in business?
While there is no need to be a financial wizard or brain surgeon to prepare a 3-Way Forecast, the key is to use a methodical approach. This is key to helping you work through the creation process step-by-step until it all comes together. However, human error happens more often than not and can lead to some serious miscalculations if the wrong formula is entered in the wrong place. This is why it is quickly becoming best practice to automate the 3-Way Financial Forecast with the help of specialised tools like Brixx.
By automating your 3-Way Forecast, you can begin to see patterns in your company’s financials. This will allow you to identify anomalies more quickly. With this 360-degree view of your business, you can check its sensibility, consistency, and internal coherence.
To build a functioning 3-Way Forecast, there are several steps you will need to take. These include, but are not limited to:
- Inputting historical information into the spreadsheet
- Determining assumptions that will drive the forecast
- Creating forecasts for the income statement
- Forecasting capital assets
- Projecting financing activity
- Forecasting the balance sheet
- Completing the cash flow statement
We cover what goes into the steps to creating a 3-Way Forecast in business in a recent post. Here, we explain the above, and go into the topic more in our free 3-Way Forecasting Guide.
Choose specialised 3-Way Forecasting software
It would not only save you time and valuable resources to choose a specialised software to create your 3-Way Forecast but it would save you and your team countless headaches. Save yourself the bulk of the heavy lifting to set up your 3 Statement Model. This aids in helping you feel at ease when revisiting it, adjusting it, and making decisions from it. When deciding between a traditional spreadsheet and an automated system, there are a number of clear differences between the two you should take into consideration.
These include, but aren’t limited to:
- Structured outcomes
- The development of analytical skills
- Risk analysis
- Logical Interpretation
- Visual representation
- Handling data complexities
Spreadsheets, whether created in Excel or in Google Sheets, are set up and created by a human. This means that the creator is able to customise the structure, formats, and models in any way the business needs. Here, there is definitely an upside to using a spreadsheet. However, because the spreadsheet is human-created and human-manned, this leaves a lot of room for human error. This may mean issues down the road that could impact your financial strategies.
When dealing with a specific structure of a model the likelihood of making errors when using an Excel model is higher than with an automated system. This is where modelling software can be a better choice as it places emphasis on standardisation and accuracy.
The development of analytical skills
Using a spreadsheet means that the forecaster will go through the painstaking process of calculating pretty much everything as they dive deep into the ins and outs of the company. This is advantageous when the forecaster is looking to better understand the business but can be a drain on time and resources that can better be allocated elsewhere. When using an automated system, it takes the company’s financial statements, capital structure, and forecast into account in order to reveal data, such as a net present value, with ease to give you the information you need when you need it.
A distinct difference between spreadsheets and software is that when it comes to forecasting, specialised software excels in risk management. While you are able to run a sensitivity analysis in a spreadsheet, the entire process is manual. Modelling software, like Brixx, makes it easy to conduct risk analysis with more accuracy and precision.
In a spreadsheet, an analyst can examine a company’s data to make certain assumptions by studying the relationship between financial statements, and ultimately compute the formula. Because software will use built-in tools, it could be difficult to assess the relationship between dependent variables. This makes it difficult to apply logic and analyze the flow of individual operations.
Generally speaking, being able to present your data in an easy-to-digest format is key. This is traditionally achieved through the use of visuals like easy-to-understand charts and graphs. When using a spreadsheet, you would typically need to create these using advanced software. However, when using a tool like Brixx, this is automatically done for you.
Handling data complexities
Whether choosing to use a spreadsheet or specialised software, each has proven to be effective when looking to handle complex sets of data. However, when it comes to computing multidimensional and large sets of data without any difficulty, specialised software generally accounts for the need to turn models on and off, and adjust objects as needed, to forecast scenarios for various needs.
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