Financial forecasting is done by estimating the financial results of a company or an organization. Financial forecasting is a businessman’s evaluation of what will be the company’s financial future. Using historical accounting and sales information of the previous and present trading patterns of the company, financial forecasting can calculate the future success of a company.
A financially successful business has a good profit margin and a thriving return on investments. It also has a stable demand even if it has seasonal products in the market. It has a good and stable balance sheet and good cash flow. A financially stable company starts with good financial forecasting. Although doing financial forecasting will demand planning and a lot of business intelligence, it is still a good way to start your company’s future.
Financial forecasting can help a business in attaining growth. By performing financial forecasting, the company can predict its financial future. Financial forecasting can prevent future difficulties like running out of capital, mortgage problems and supply chain management issues. With proper financial forecasting and planning, a detailed picture of the company’s financial success can be predicted.
Here are some tips in financial forecasting.
- Start from zero. In business, starting from zero means that the forecaster will predict whether the products that are in the store today would still exist next year. The forecaster should make an assumption whether the product in question will increase or decrease the future revenue. By starting from zero, the business can build a reliable financial forecast.
- Compute the budget from the lowest level. In financial forecasting, the analyst should always see the company as a whole. The analyst should also take into consideration the small parts of a business. Financial forecasting will be more accurate if it includes the lowest aspects of the business.
- Calculate revenue and expenses. Calculating revenue and expenses will give the analyst a good idea on how much cash the business needs. It can give the analyst a better idea of the revenue next year. It can also estimate how much money the company can expect in return.
- Understand the balance sheets. Balance sheets are snapshots of the company’s financial position. It is where the assets and liabilities of the company are listed. Clear balance sheets can help the analyst understand the company's current financial situation. This method can help create a clearer financial forecast.
- Organize cash flows. Cash flow is calculated to determine the business’ rate of return and the owner’s equity. It is very important that the analyst understands the cash flow of the company. It is where the forecaster will base the format of the financial projection. It can tell how much the company should spend on certain plans and how much the company will earn from them. Projecting cash flows will help the company in developing a good financial strategy in the future.
With the use of software like Cognos, Oracle or Halogen, financial forecasting can be easy. It is a helpful method in predicting the financial growth of a business. Whether the business is just as simple as a small retail store or a big corporation, the idea of how much it will need to proceed in the coming years can help the company run smoothly with fewer problems.