Importance of financial forecasting
A successful business does not occur overnight. It involves extensive analysis, detailed insight, and full involvement of the financial department. A good accountant can create an accurate financial forecast by putting together the past and current financial affairs of a business. A forecast not only predicts the future demographics of a company but can also help in evaluating its progress by comparing visible finances with forecasted finances while suggesting the improvements needed.
Why do you need a financial forecast?
Most businesses fail to grow due to a lack of business planning. Financial forecasting helps in determining reasons behind, cash flow shortage, struggle in financial stability, and gives valuable insight to business prospects. While lack of financial forecasting results in uncertain finance and an inability to cope with sudden changes in a business environment.
Benefits of financial forecast
Undoubtedly businesses that incorporate financial forecasts in their business plans are better prepared for future endeavors in their business. The benefits of a financial forecast include:
- Businesses can allocate finances for the promotion campaigns by determining their financial status.
- Estimation of your financial requirements.
- The smooth functioning of the business.
- Helps in better management decision.
- Helps in evaluating the shortcomings in your finances beforehand.
- Better control over cash flow.
Types of financial forecasting
The generally used methods in financial forecasting are qualitative techniques of financial forecasting and quantitative techniques of financial forecasting.
Qualitative Techniques of Financial Forecasting
- Executive Opinions – involves the expert opinion of various departments.
- Reference Class forecasting – predicting different outcomes by putting the same scenarios into reference.
- Delphi technique – involves a series of questionnaires asked from different experts separately. The result of the first questionnaire is compiled and the second questionnaire is prepared based on the results of the first questionnaire and presented again to the experts for answers. The process is continuing until a narrow shortlist of opinions is obtained.
- The opinion poll of the sales force – an opinion poll of salespersons is conducted to forecast sales. This method provides suitable data for sales forecasting because the sales force is usually in touch with market conditions.
- Consumer Survey – analytical data of public opinion is generated by using consumer surveys. This data helps in forecasting market and consumer trends of certain products.
- Scenario writing – involves generating all possible outcomes based on certain criteria. The most likely outcome is selected by management.
Quantitative Technique of Financial Forecasting
- Pro Forma Financial statement – a financial report generated by using hypothetical data about events that may have occurred in past or might occur in the future. Learn more
- Series forecasting – involves models that describe events in a given time series to understand the underlying cause. It involves developing a mathematical model that provides a plausible description from sample data. Learn more
- Cause and effect analysis – this technique is used to forecast all possible causes of a problem. This helps in solving a problem that may occur in the future without it causing any damage. Learn more
Guide to financial forecasting
Method for revenue forecasting differ according to the type of industry you are working with i.e., for the retail industry the expansion rate and drive income per meter square is forecasted; for the telecommunication industry current market share, its size and competitor analysis can be predicted; for service industry headcount and use of income for consumer-trend can be estimated.
Forecasting Gross Margin and SG&A Expenses
Gross margin can be forecast using historical trends and figures, but a detailed approach by including all possible factors can provide you with a more precise forecast. Whereas forecasting general, and administrative costs are often done as a percentage of revenues. These costs are fixed for the short term but become variable in the long term.
Click here for a complete guide on how to forecast revenue, gross margin, and SG&A expenses using excel sheets.
Lyel Accountants financial forecast services for SME business
Financial forecast not only readies your business for future possibilities, but these forecasts can also help you win potential investing and fundings. Lyel Accountants helps you set up an efficient report by using the most reliable data while giving you the most accurate forecast. We make sure your business is in line with future requirements. And you are in financial peace of mind.
“A big part of financial freedom is having your heart and mind free from worry about what-ifs of life”
If you would like more information regarding this, get in touch with us on 0113 436 0002 or use the form below.