Creating a Financial Forecast: A Step-by-Step Guide for Businesses

Uncertainty is standard in businesses of all sectors. Some things just aren't within our control and can have a strong influence on the market. For instance, the advent of new technologies, like AI, constantly changes business operations across nearly every industry at the base level. For a business to weather the storms of change, it’ll need to be in front of innovation and be prepared financially for whatever the solution may entail. This is where financial forecasting can help businesses estimate sales and profit to make more informed decisions. One of the key skills to know or even outsource is how to create a financial forecast and more importantly, how to implement it. In this article, we’ll go through the step-by-step procedure of creating a financial forecast for businesses small and large.

Defining the Purpose or Intent of a Financial Forecast

The first step of creating a financial forecast should have questions like:

●     What does the business learn from forecasting?

●     Does the business hope to estimate the number of units of products or services to sell?

●     How will the existing budget shape the future of the company?

Defining the purpose or intent of the financial forecast is paramount to determine the factors and metrics of executing it.

Gathering Past Financial Statements and Data

One of the aspects of financial forecasting includes evaluating and assessing past financial statements. So, it is vital to acquire all the relevant historical records and data, including:

●     Total revenue

●     Profits

●     Losses

●     Investments

●     Equities

●     Liabilities

●     Expenditures

●     Earnings per share

●     Comprehensive income

●     Fixed costs or expenses

Ensuring that the organization gathers all relevant information as accurate or excluded data results in correct financial forecasting is critical. Organizations should know how to create a financial forecast and precise sales and profit estimation.

Picking a Time Frame for Financial Forecast

Financial forecasts render organizations an insight into their future. Financial forecasting helps businesses decide how far to look into the future and ranges from weeks to years. Most organizations execute financial forecasts for one fiscal year as they change over time. Factors like market trends and existing business conditions impact financial forecasting. Studies show that financial forecasting is more precise when it is short-term. A short-term time frame for financial forecasts is ideal for most businesses.

Picking the Financial Forecast Method

Organizations select from two financial forecasting methods.

1. Quantitative Financial Forecasting

The method uses past data and historical information to recognize and understand market trends and reliable patterns.

1. Qualitative Financial Forecasting

The financial forecasting method evaluates the opinions and ideas of experts about the organization and the overall market.

Each financial forecasting method is apt for different business types and has strengths and shortcomings. Out of the two, qualitative financial forecasting is favorable for startups and new businesses as there are no historical records and past information to refer to when estimating. Organizations should evaluate the ideal method and know how to create a financial forecast depending on their businesses.

Documenting and Monitoring the Outcome

Financial forecasts cannot maintain 100% accuracy as they tend to change constantly. So, it is vital to document and monitor the outcomes or results of financial forecasts, particularly after significant internal and external developments. Businesses should update their financial forecasts to exhibit the latest growth and developments. Leveraging the benefits of forecasting software or platforms automates tasks and makes things easier and more convenient.

Analyzing the Financial Data

When organizations regularly assess and analyze financial data and information, it is the most effective method to understand whether the forecasting is accurate. In addition, consistent financial analysis and management help organizations to prepare better and more meticulously for the upcoming financial forecast. Regularly evaluating the financial forecasts gives a deep insight into the present financial performance and condition. To perfectly implement the anticipation, analyzing the financial data and how to create a financial forecast is paramount.

Conclusion