A blueprint of your business vision is essential to communicate your assumptions about future revenue, expenses and strap your boots against any unexpected changes. Investors, employees, lenders often rely on financial forecasts to understand your strategic plan for the company.
What is financial forecasting?
Financial forecasts rely on the analysis of historical financial data together with future expectations alerting business owners to any potential sales shortfall or pending debt. They take various macroeconomic factors into account like inflation, consumer spending, employment rates, industry-specific trends, competition etc. It is a potent tool to analyze the current financial health of the company and estimate the future expenses and incomes based on the predicted demand of the products and services offered. Financial forecasts also help to prepare businesses against worst-case scenarios and can help to make more informed business decisions.
Elements of financial forecasting
Financial forecasting utilizes Pro-forma financial statements like
Pro forma financial data is built upon the anticipated future revenues and expenses by applying the trends visible in your historical financial data.
In general, financial forecasting involves 3 steps:
This is a simplistic explanation of forecasting. A more detailed and in-depth approach is applied in real life incorporating projections and financial modeling. It helps to engage the services of a professional to arrive at a more robust financial forecast.
Advantages of regular financial forecasting:
Financial forecasting is an important business tool to streamline your goals and resources and hence making sound business decisions. A robust financial forecast depends on the accuracy of your historical data. Hence it is of utmost importance to keep your financial data up to date and accurate.