What is Financial Forecasting and How it Helps your Business
Financial forecasting is a method of predicting the growth of a business using the data from past transactions. This helps businesses to recognize the areas that need special attention as well as find out the ones that might not need much funding moving forward. In other words, financial forecasting is a way to plan for the expected expenses by analyzing previous costs and allocate the budget accordingly for a better tomorrow.
Financial forecasting can help businesses to calculate the potential revenue or loss and manage the funds logically in view of that. It can simplify the decision-making process, by assessing the marketing efforts of the recent past and figuring out whether they were worth the cost. Forecasting also helps to understand cash flow in a simpler way, and estimate the sales and probable profits.
Basic Models of Financial Forecasting
There are a lot of different approaches to forecasting business growth, but all of them use any of the following three models.
- Extrapolation – This method analyzes historical revenue data in order to calculate the prospects of the business. It uses a time-series method of quantitative forecasting where the data is collected over a defined period to identify future trends.
- Regression/Econometrics – This method employs a statistical procedure to forecast business growth. The main technique here is to evaluate the relationship between the dependent and independent variables that usually lead to revenue generation.
- Hybrid Forecasting – This method takes practical aspects into account to predict the growth of the business. Instead of using data and statistics for estimating potential sales and revenue, this technique uses knowledge-based forecasting to provide more accurate results.
Before choosing any of the said models for financial forecasting, you need to carefully review the company balance sheet to understand what assets and liabilities you have as of date. Moreover, have an idea of the last year’s expenses as well as the expected costs for the upcoming projects and promotions. Once you have those details ready, get in touch with a financial advisor to select the right forecasting approach for your business.
Remember that the varying state of the economy and the rising competition in the industry can be big factors that can affect the metrics of your forecasting. Then there is the ever-changing technology and seasonal cycles as well; how well you adapt to such things can have a great impact on the financial forecasting for your business as well. Still, with proper financial forecasting, you can always be prepared for any unexpected decline in the business turnover.