Every business process requires planning, including predicting unforeseen events.
For the most part, the company’s financial aspect needs the guesswork as it affects almost all the factors that run a business. From budgeting and sales to hiring, professional development, and other financial decisions, you can say financial forecasting is a lifeline of managerial decisions.
Likewise, it requires expertise and management skills for accurate data and results. But first, what exactly is a financial forecast, and how can it be strategically done?
Financial Forecast in a Nutshell
In its most straightforward term, “financial forecast” predicts the company’s financial future measured by past performance.
From these data, you can derive future assumptions and determine how they might impact your company’s future. Companies can plan for risks or capitalize on opportunities that lie ahead in their industry.
A 2020 survey reports increased importance in financial planning and analysis, agreed by 72% of finance executives. Among the best financial practices you can embody in your business is to do a financial forecast.
I’d like to know better how to maximize the potential of your business and run it smoothly with this powerful tool.
Why Is It Important?
Financial forecasting is essential as it allows organizations to make informed decisions when allocating resources and investing.
In addition, they can create strategies to maximize profit while avoiding unforeseen losses. For example, if a company expects an increase in customer demand in the coming months, it could invest in more inventory to meet these needs without risking too much capital.
While it may sound complex, financial forecasting can be done strategically. You can build your own financial model through Excel training and similar professional development courses. You can start with creating simple calculations by taking an advanced Excel course.
Luckily, Excel training courses are readily available to get you started.
Predict future revenue and cash flow by using different business prediction methods narrowed down below.
5 Methods of Financial Forecast
There are two primary categories in financial forecasting – quantitative and qualitative. To differentiate them, let’s start with a more analytical approach.
Quantitative forecasting predicts potential outcomes by collecting data from historical events and trends. From there, it can make assumptions about the future.
This technique relies heavily on numerical evidence and calculations. It allows you to predict potential economic and stock market changes or other financial aspects.
Common quantitative business predictions methods include:
- Straight Line
- Percent of Sales
- Moving Average
Qualitative forecasting, on the other hand, utilizes expert opinions and judgment. This analysis involves gathering insights from industry professionals to determine possible scenarios.
Since it doesn’t rely on numerical evidence, it uses experience and knowledge to interpret the next big thing. Surprisingly, it is considered more reliable than quantitative methods.
Common qualitative forecasting methods include:
- Delphi Method
- Market Research
While forecasting methods are not foolproof like all other informed guesses, they can give you a spectrum of options to predict the future.
You can soon maximize their functions through a professional skills course. For a quick overview, below are more details of these financial forecast methods.
Straight Line Forecast
The straight line can anticipate future financial scenarios through a simple but reliable forecasting method. It’s also the most commonly used method in predicting revenue growth.
Basically, you will create a line that connects your current sales data to where it will be in the future. This allows businesses to anticipate their revenue and adjust accordingly.
With its straightforward approach, straight-line forecasting can be uncomplicated and won’t require too much time and complex calculations.
Its simple structure offers a clear view of potential growth and helps business owners significantly.
Percent of Sales Method
Percent of sales helps you quickly estimate the cash your business makes over a certain period. In short, it’s the fastest way to forecast your financial situation in the next year or so.
To give you a detailed context, this method calculates all financial line items as a percentage of sales. Sales estimates are then based on those percentages to calculate the future value.
Major factors to consider are current sales and the previous year’s. You’ll have peace of mind when you have an estimate of how much you can expect to earn during a certain period.
Additionally, having this knowledge helps you decide if you can afford an expansion or marketing efforts.
From the name itself, the moving average method considers average values to predict future outcomes. This method involves shorter timeframes compared to the others, taking only days, months, or quarters.
Like the straight-line method, this approach doesn’t require complicated calculations or sophisticated techniques. Instead, it looks at patterns in existing data and uses those to indicate potential outcomes.
You can predict constantly moving investments like next month’s sales or stock prices. Ultimately, it helps investors determine how their stocks may perform, allowing them to decide when to buy and sell.
Moving on to the qualitative approach, the Delphi method predicts business performance through consulting experts.
This method has become popular in recent years because it offers a more accurate prediction of business performance. It involves gathering a group of experts to form unbiased opinions based on knowledge and experience.
The data-gathering process usually comes in the form of questionnaires circulated until it reaches a consensus. The consensus reached is then used to predict the future of the company or project.
Eventually, the Delphi method helps businesses make smarter decisions by bringing together diverse perspectives. Moreover, it removes bias from the equation as everyone involved works towards finding common ground.
Companies use this method to gauge how likely their investments will thrive and succeed. It also allows them to invest with confidence and caution.
Furthermore, it provides greater transparency into the analytic process and less space for errors.
Market research does not fall far from the Delphi method. It’s more focused on organizational planning and helping leaders view the market holistically.
Similarly, it helps look at a problem or goal from multiple angles. This includes looking at customer preferences, current trends, and potential risks in the marketplace.
Conducting market research helps businesses understand how their products and services fit into their respective markets. The end goal remains to be making informed decisions and planning future strategies.
The data-gathering process in market research can be through polls, interviews, surveys, focus groups, and more. Businesses can evaluate their target audience from there, including competitors and other factors within the industry.
Financial forecasting can be a great tool for businesses to predict future financial situations. However, it’s never a promise.
It’s simply part of the decision-making process, specifically financial ones. It solely helps a business or individual gauge how much to make or spend and which investments might yield the highest return.
By being able to predict these things, people can make informed decisions on allocating their money and resources accordingly.
For instance, for a businessman to start up a new company, they need to have a reliable understanding of potential income and expenses before committing time and money to it. Whether it’s hiring more employees, buying new equipment, or investing in marketing campaigns, you won’t afford to lose what you don’t have.
Financial forecasting can help them better plan for any possible scenarios that come with running a business.
It may all sound complex to make at first, but having Excel advanced skills will make it easier.