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What Is Financial Forecasting?
Financial forecasting is a technique that used to estimate a company’s future financial outcomes by examining historical data. This allows management to make informed business decisions whilst determining the direction of future trends.
Forecasting is used to help businesses predict a variety of factors to determine; how to use their budget, how to control stock inventory, what trends are upcoming, which expenses to anticipate and much more.
This extensive approach to collecting and analysing data can be central to projecting demand for goods and services, which, if meticulously tracked, can allow you to grow your business in good conditions.
Benefits of Financial Forecasting
- A Financial Forecast can be useful tool of persuasion for potential investors
- It can be used to benchmark the potential performance of the business in a given industry.
- It can used to form part of a business plan.
- It can be used in the retail and service industry to predict seasonal requirements so as not to have surplus inventory, especially with perishable stock.
- It can be used in by service-based businesses to interrogate the requirements of a project when it comes to staffing, systems and purchases.
- It is especially useful in manufacturing for lean production based on anticipated demand for a product or product related service.
- Used correctly it can boost revenue during key trend periods of the year via facilitating the ability to boost sales.
- A management team can use financial forecasting and take immediate action based on the forecasted data.
- Forecasting can be used to set budgets and targets for the months and year ahead.
How Often Should a Forecast be Revised?
Financial Forecasts can be performed for both the short-term and the long-term, this can mean for the quarter ahead or even the year ahead. It is advisable to review them regularly as the future is uncertain and predictive results can vary greatly.
You may want to revise your forecast on an ad-hoc basis, for example when there is a change in circumstance relating to business operations, stock availability or customer base.
Short term forecasts can be beneficial for adjustments to production and inventory levels. Whereas a long-term forecast can help develop a company’s business plan – it really depends on your current goal or business objective.
What Should Be Included in a Financial Forecast?
A financial forecast is usually limited in scope, focusing on expense line items and major streams of revenue.
There are critical differences between budgeting and forecasting. For example, budgets are created to meet a goal, such as quarterly growth. Financial forecasting examines whether the budget's target will be met or not throughout the proposed timeline. The content of a budget and financial forecast is different—the former contains specific goals like the number of items to sell or the amount of money to earn. The latter shows the expectations of how the budget will be met.
Financial Statements to Include in Your Forecast
Your forecast will need to include three financial statements:
- The profit and loss (P&L) statement
- The cash flow statement
- The balance sheet
Profit and Loss Statement
The profit and loss statement allows you to evaluate:
- the growth of the company by analysing the progression of the turnover over several years
- the profitability of the company by looking at the difference between the anticipated revenue and the costs which will need to be incurred to generate these sales
Cash Flow Statement
This shows all anticipated cash movements for a given year.
It enables you to assess:
- the company’s ability to generate operating cash flow
- the company's investment and financing policies
The cashflow statement is highly complementary to the P&L statement. Together they provide a clear view of the company's profitability, the cash generated by the operations, the investments made and the financial flows of the business.
Balance Sheet
The forecasted balance sheet provides an overview of the company's net worth at a given moment in time. It enables you to evaluate:
- the value of the company's assets
- the weight of its working capital
- the level of financial debt
- the book value of shareholders' equity (total amount of tangible assets minus the liabilities)
These three statements along with collected; transaction, behavioural and sales data will enable you to fully interrogate the financial history of the business. This will in turn enable you to create a template of what the future may look like as a forecast.
How Can I Make Forecasting Work for Me?
Financial Forecasts help managers, analysts, and investors make informed decisions about the future. Without good quality forecasting, many business owners would be in the dark about their company and resort to guesses or speculation. By using qualitative and quantitative data collection and analysis, you can get a better handle of what lies ahead.
You may know other businesses who use forecasts and projections to inform managerial decisions and capital allocations. It can offer peace of mind and be beneficial to know you’re on track if you are able to use forecasts to estimate corporate earnings for subsequent periods, especially when navigating tough economic times.
However, since we cannot definitively know the future, and since forecasts often rely on historical data, it’s best to depend upon professionals for as much accuracy as you can get. Your accountant should be able to provide you with the data sets and statements you need to create a forecast for your business.
Cloud based accounting software can also provide good quality reports when building out a bigger picture. If you’re not already using one, now is the time to get onboard. Speak to us about which would be right for your business.
At Blue Rocket Accounting, we offer expert support and guidance to a wide range of businesses. Our Management Accounts service can provide you with all you need to ensure your business is running effectively, prepared for the future and focused on any growth mission you have in mind.
Speak to us today to find out more about our services and how we can support your business, call us on 01322 555442.
