Financial Forecasting

Financial Forecasting

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Small businesses may think it is uncertain to predict where the business would be in the next year because it is unlikely to know what will happen tomorrow. It is important to know that your business always needs directions. Not knowing where your business stand can have negative outcomes. This is why financial forecasting is critical to helping a business develop and create realistic budgets.

Financial Forecasting is the process of predicting how a company will perform for the upcoming years. Pro Forma statements (Income, Balance Sheet, and Cash Flow Statements) are used to populate this information. Financial forecasting can offer estimates on a business’s future revenue and expenses. There are two types of forecasting, historical and research-based forecasting. Using your financial statements from the past to plan the future is considered Historical Forecasting. From there, you can estimate how fast your company will grow for the following years.

Researching market trends is called Research-Based Forecasting. This type of forecasting is what lenders or investors intend to see. You examine your industry performance for over the past five to ten years, explore new advanced technologies and customer trends, or compare yourself to your competitors. Nearly every financial forecast includes both historical and research-based forecasting. Below is how a financial forecast is developed. 

  • Gather your past financial statements. Before forecasting, you’ll need to look at your past financial statements to see how your business has been functioning to project your income, cash flow, and balance. If this is not accessible, an accountant will be able to generate your financials for you. 
  • Decide the type of forecast. Depending on your business needs you can decide on historical or research-based forecasting or both. Creating business plans tend to use both to present to lenders or investors.  
  • Prepare your statements. Now you have gathered your information, it is time to construct your forecast. Just as mentioned in step 1, an accountant would be best to do this for you.

Forecasting sets businesses up for success. The more rugged your forecast is, the better you’ll be able to plan the future of your business. Also, you will move financiers and lenders, by demonstrating you have thought about every potential outcome.

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