How to do financial forecasting?
The essential features of the company’s s future and current operations depend on the results of the financial forecasts. Because the investor’s decisions determine how much a company can get credit or more. But cannot overemphasize the accuracy of the predictions.
These tips will take you through to do it.
1. What is the purpose of a financial forecast?
There are three aspects that you can expect from learning the financial forecast.
You must estimate how many units of your products or services you can sell.
Will your current budget influence your future?
Knowing the financial forecast’s purpose helps you determine which factors and metrics to consider when doing it.
2. You need to have past financial records and historical data.
One of the main elements of financial forecasting is analyzing past data. Therefore, it is essential to gather all relevant data and records.
- Revenue
- Losses
- Liabilities
- Investments
- Equity
- Expenses
- Comprehensive income
- Earnings per share
If you want to maintain the accuracy of the financial forecast, you cannot miss any of the relevant data and records for the above.
3. Choose your financial period for your forecast
A financial forecast is the perception of the future of a business, so you can decide the period it can go from weeks to years. But most companies prefer a financial year to do the forecast.
The financial forecast can change if the environment and the specific situation in the business; therefore, the more accurate estimates you produce could be for a shorter period.
4. Choose a financial forecast method
There are two financial forecasting methods:
- Quantitative forecasting uses historical information and data to identify trends, reliable patterns, and trends.
- Qualitative forecasting can analyze experts’ opinions and sentiments about the company and market.
Both methods are suitable in their ways and also have their strengths and weaknesses. But the qualitative shortcoming is ideal for the new start-ups because they do not have the past date.
5. Document and monitor results
You should keep records of the results as they could not be 100% accurate, especially when you have external and internal developments. That helps you to monitor your results as and when needed. Then you can easily automate the monitoring using forecasting software, making it easy to get updated results.
6. It is vital to examine the financial results.
If you need accuracy in the forecast, it will help to examine the financial data regularly.
Besides, when you do it continuously, that assists you to prepare for the next period quickly, and also, you will know the company’s performance.
7. Do not miss doing the same on the date you have done it last.
Innovative companies conduct regular financial forecasting to stay in the know and control. Do not wait till the economic forecasts become outdated repeat the same process on time. It’s also prudent to keep collecting, recording, and analyzing data to improve your financial forecasts’ accuracy.
When you do the forecast, it will help you if you make f-different versions of it, such as:
- Aggressive
- Moderate
- Conservative
Aggressive
It is a forecast that suggests your business’s success exceeds your expectations.
For example, say you rationally assume that your monthly sales will grow by 10%. You would have sales growing at 20% or more in your aggressive forecast.
Moderate
This forecast will reflect your reasonable predictions. For example, if you rationally predict 10% sales growth, this forecast will remember sales growing at 10%.
Conservative
This forecast will reflect your business falling short of your expectations. For example, if you rationally predict 10% sales growth, this forecast will remember sales growing at 5% or less.
When you have different situations, that will build your confidence.
Be Able to Explain Each One of Your Assumptions
Be very critical of the assumptions you include in your forecast.
Second, guess your assumptions until you clearly understand why you chose them.
Record every assumption you use in your financials to refer to them quickly.
Explain your assumptions thoroughly to yourself and others. It is often more critical to successfully explain the thought process and logic to determine your deductions than to predict the future.