One of the best tools a business can utilize to know where it currently stands and where it needs to go to achieve its financial objectives and goals is the financial forecast.
What is a Financial Forecast?
For uninitiated, a financial forecast is a fiscal management tool that presents a systematic projection of expected actions your finance operation should take. Basically, creating a financial forecast is like plotting the route you need to take to arrive at your destination.
Planning for sales declines should be taken into consideration. For example, your business may experience a decrease in sales in the rainy season, and solutions should be made to overcome these obstacles e.g. start a more rigorous marketing campaign before the rainy season starts, or offset the season’s/quarter’s sales target to next season/quarter.
To perform projections and forecasts, various financial statements should be accessed – including past records, cash flow, and fund-flow behavior, the applications of financial ratios, etc. together with considering the economic condition of the industry which the business operates.
While the financial forecast is just a smaller aspect of a larger planning process within an organization, it has an immense impact on the overall decision-making process. Such advantages of financial forecasting are:
- Validates the financial viability of a new business venture i.e. allowing you to create a model that proves how the business might gain significantly if certain strategies, actions, and plans are performed.
- Allows a business to measure its actual financial operation against the forecast financial plan, and adjust where necessary.
- Provides better control over the business cash-flow.
- Provides a benchmark where future performance can be measured against with.
- Spot any potential financial risk and shortfalls to avoid financial trouble.
- Helps explain the requirement of additional funds for the business.
- Helps prove a business capacity to repay a loan to its investors, suppliers, and banks.
Now that you understand how financial forecasting can help you make a better decision for your business, it’s now time to familiarize yourself with its fundamentals. Financial forecasting includes the preparation of the following: