Industry Expertise · July 24, 2020

Why Your Trade Association Needs a Financial Forecasting Model

A financial forecasting model is a valuable tool for planning an organization's future. It 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.

The economic uncertainty brought about by COVID-19 has only increased the need for trade associations to conduct annual financial forecasting. With this information, you'll have a greater understanding of the organization's financial position and will able to make more informed operational decisions.


Where forecasting can help

A financial forecasting model allows your trade association to evaluate current and future expenditures and revenue to guide policy and programming decisions, and manage a surplus or avoid a shortfall at the end of the year.

For example, if the forecast predicts a revenue surplus, your association can put more money toward member services, hire additional employees or hold more events. If it looks like there will be a shortfall, you can shift to programs that generate more cash flow, such as special member-funded projects, or by cutting back on marketing.

How to start financial forecasting

Trade associations of all sizes can forecast major revenues and expenditures annually or biannually. These numbers can provide a baseline from which you can measure the success of programs and initiatives. The forecast should extend at least 3 years into the future.

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 3 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.

A road map for success

A financial forecast can show you what 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.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.