How often should you review your financial models?

How often do you really need to update your financial models and forecasts?

Every good forecast is built on solid assumptions, and it’s important to review those assumptions regularly, but nobody wants to live in their financial models 24/7...so, how often you need to update your financial models and forecasts depends on 2 things:

How quickly things change in your business

This part is pretty straightforward. For example, if you rely on a few large unpredictable deals each month, you'll want to update your forecasts as soon as a deal timeline changes. Or, if you're constantly testing new marketing campaigns, you'll likely need to update your forecasts both pre-launch (when plans/timelines are approved) and post-launch (if certain assumptions aren't playing out as expected). Basically, any time your outlook changes, so should your forecasting assumptions. Otherwise you'll always have forecasts based on some old reality, and you won't be able to see what that delayed project, or that new referral program means for your finances going forward. Outdated assumptions make your forecast useless, so if things are changing every day, then you might need to update certain parts of your model daily (or at least weekly). But not always...

If your business is fairly stable and there aren't too many surprises after you put a plan in motion, then you might be able to let your assumptions and forecasts sit untouched for a month or more at a time. However, as a rule of thumb you should never go more than a quarter without taking a serious look at whether your assumptions still hold true, or whether there's any new information to include in your model. It doesn't matter what business you're in - things change. Update your assumptions any time they do.

The purpose your financial model is serving

Models aren't just there so you can update them. They can (and should) be used more proactively when you're making decisions large and small, so it's important to think about when it makes sense to lean on your financial model and cash flow forecast for insights, and what you want them to show you.

If you just want an idea of where your business is headed long-term, based on the way things have generally been going, then you might be able to skate by with monthly or quarterly reviews, just checking in and making a few updates to the model whenever you're curious. However, in this day and age, most businesses need a lot more visibility and control over their financial situation, so they're typically going above and beyond - not only in the frequency of their reviews, but also in the way they're leveraging their models before decisions are ever made.

Let's say there are a couple of cool things coming up on the horizon (e.g. new product launch and partnership) and they seem like they'll probably be great for the business. Gone are the days of "let's see how it goes." Today more than ever, entrepreneurs are jumping into their forecasts before those kinds of decisions are even made, to see exactly what the impact would be to their finances. This gives you visibility into how your margins, cash flow, and other key financial drivers will react before you pull the trigger.

To take it a step further, let's say you have an A vs. B decision, and you can only choose one course of action. In this case, updating your forecast ahead of time isn't enough. You'll need to compare scenarios.

What are scenarios?

Scenarios are copies of your main financial model and cash flow forecast - like a parallel reality - where you can explore different combinations of assumptions, and then compare the outcomes against your main forecast. For example, you might look at your forecast and see a cash shortage on the horizon, and you’re not sure whether you should liquidate product, cut costs, get a loan, or raise a round of equity financing to plug the gap. It can be easily cleared up by building a financial model and cash flow forecast for each option, and comparing the outcomes to see which one makes the most sense for your business. Then when you pull the trigger, you can do it with full confidence and get back to business without missing a beat.

As a final piece of advice, it’s always good practice to build a set of best and worst case scenarios for your business, and review those models quarterly. Even if the odds of a wild swing are slim, it’s better to know ahead of time what could happen if the worst case scenario unfolded, or even if you started growing way faster than expected, so that you know how to prepare/react.

We live in a crazy world, but if you stay on top of your forecasts and use them wisely, you’ll see things coming from a mile away.