Five Year Financial Projection Q&APosted on May 12, 2016, 12:00:00 AM
Local government leaders that approach a five year financial projection with a strategic perspective understand that a financial projection is more than just a spreadsheet. A meaningful multi-year financial forecast can produce tremendous value for a local government to help facilitate organizational growth and improvement.
What is the value of a five year financial projection for a municipality?
A well-constructed five year projection offers both operational and strategic value. From an operational perspective, your projection can be used for budgeting, cash flow planning and to identify long-term investment opportunities or short-term borrowing needs. It can also be used as a foundational support document for your bond ratings or continuing disclosure obligations. From a strategic perspective, a comprehensive projection can be the centerpiece for decisions related to future municipal services and infrastructure improvements.
How are local government leaders using a five year forecast?
The best forecasting models allow administrators to simulate multiple “what-if” scenarios. The benefit of a budget simulator is to be able to quickly and confidently answer questions about new community investments and other affordability issues with a longer term perspective. Additionally, you can use scenario comparisons and data visualization to engage decision makers and stakeholders with graphical output that increases their understanding and accelerates decision timeframes.
How can a governance board best use a five year forecast?
For many organizations the five year forecast becomes the central tool in discussions about finance. Once the governance board becomes familiar with the mechanics of the forecast and their preferred report views have been created, many budget and financial discussions lead to the question, “how does this impact our five year projection?” By extending the focus point for decisions out to a longer time horizon, boards focus on growth and sustainability. The projection can provide them more insight and certainty in decisions, and subsequently, increase the confidence of their community.
What are the critical components of a good financial projection?
- The source and structure of the foundational data. If you are using your budget structure for the projection, you will need to determine the level of granularity that you want to use to support decision making.
- The assumptions and variables that will drive future revenues and expenses. Understanding the key variables and their relative impact on financial outcomes is critical.
- Reporting output that people can understand. Your audience may represent a wide spectrum of experience and analytical perspectives. Supporting your projection with both tabular and graphical data is important for improved understanding and engagement.
How have local governments benefitted from multi-year projections?
A well-constructed and documented forecast not only assists in decision making, but it can establish a professional brand for the municipality that can provide significant value over time. Local governments that demonstrate a high level of command over their financial data and projections can enjoy higher levels of buy in and support from their communities. Additionally, sharing the projection and key assumptions in a public forum demonstrates transparency, which can be an invaluable asset for building positive public perception.
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Mike English is a founder and the CEO/President of Forecast5. Mike has spent his entire career concentrating on the development of financial and strategic solutions for schools and municipalities. Forecast5 is headquartered in Naperville, Illinois – a suburb 30 miles west of Chicago.