Financial forecasting is like looking into a crystal ball for your business’s money. It helps us guess how much money we might make or spend in the future. Read on to know more about how financial forecasting is planned, what is its importance and what are its types.  

Why is Financial Forecasting so important? 

Imagine you’re driving a car, but it’s dark, and you can’t see the road ahead. That’s what it’s like if we don’t do financial forecasting for our business. Here’s why it’s super important: 

1. Planning the Yearly Budget

Imagine we have planned the budget for a whole year. It helps us figure out how much money we need, what we’ll have, and what we want to achieve. But making a good budget is like making a good recipe – we need the right ingredients. Financial forecasting gives us those ingredients by telling us what might happen in the future. So, our budget is more accurate and helps us spend our money wisely.

2. Setting Realistic Business Goals

Imagine playing soccer without knowing the size of the field. You might kick the ball too hard or not hard enough. The same goes for our business. Accurate financial forecasting helps us predict how much our business will grow or if it might get smaller. This way, we can set goals that make sense. It’s like knowing the size of the soccer field so we can aim for the goal accurately. 

3. Finding Problems

Think of your business like a detective story. You want to catch problems before they become big mysteries. Financial forecasting is like your detective tool. It helps us look at what happened before and what might happen next. If something looks fishy, we can investigate and fix it before it causes big trouble. 

4. Reducing Money Risks

Imagine going on a shopping spree without knowing how much money you have in your wallet. You might run out of cash and end up in trouble. Financial forecasting is like checking your wallet before you shop. It helps us make better money choices, so we don’t overspend or save too much when we can invest. 

5. Attracting Investors

Imagine you want to build a sandcastle, but you need some help. You show others your sandcastle plan, and they decide if it’s worth helping you. Investors are like those people, and your business plan is your sandcastle plan. Financial forecasting is the part where you explain how your sandcastle will grow and how they can benefit from helping. It shows them that you have a solid plan, and your business looks promising. 

Types of Financial Forecasting 

There are four common types of financial forecasting that businesses use: 

1. Sales Forecasting

This means guessing how many products or services you’ll sell in the future. There are two ways to do this: looking at the big picture (top-down forecasting) or starting with small details (bottom-up forecasting). It helps with planning and managing resources.

2. Cash Flow Forecasting

This involves estimating how money will flow in and out of your business over a certain time. It’s based on your income and expenses. It helps you see if you need money soon and helps with budgeting, but it’s better for short-term planning.

3. Budget Forecasting

Your budget is like a roadmap for your business. Budget forecasting tries to figure out what will happen if everything goes as planned. It uses data from financial forecasting.

4. Income Forecasting

This looks at your past earnings and how fast your business is growing to guess how much you’ll earn in the future. It’s important for cash flow and balance sheet forecasting, and others use it to make decisions, like suppliers deciding how much credit to give you. 

Now, let’s talk about how to do financial forecasting in seven steps:

1. Know why you’re doing it

First, figure out why you want to forecast your finances. Do you want to know how much you’ll sell? Or how will your budget work in the future? Knowing this helps you focus on the right things. 

2. Collect Past Data

Get all your old financial papers and data. This includes things like how much money you made, how much you spent, and other financial details. Don’t forget anything, or your forecast won’t be good. 

3. Decide How Far Ahead to Look

You choose how many weeks, months, or years you want to predict. Most businesses look one year into the future. Remember, long-term forecasts are less accurate.  

4. Pick a Forecasting Method

There are two ways to guess what will happen:  

– Numbers and Data:

This uses facts and numbers from the past to guess the future. 

– Opinions and Feelings 

This looks at what experts think and how they feel about the market and your business. This can be useful for new businesses.

5. Write Down and Watch

Keep a record of your forecast. See how well it matches what’s happening. Things can change, so update your forecast when needed. Using software can help make this easier. 

6. Check the Numbers

Regularly look at your financial numbers. This helps you see if your forecasts are right. It also helps you understand how your business is doing now.

7. Do It Again

Keep doing this regularly, following the time frame you picked earlier. Keep collecting data and checking how well your forecasts match reality. This will make your forecasts better over time. 

Why do we use forecasting in financial planning? 

Forecasting helps us make educated guesses about important money stuff like sales, income, and future earnings. These guesses are super useful when we’re making money plans, like budgets. So, forecasting is like our guide for money planning. 

Endnote

Financial forecasting is like predicting how well a business will do in the future. Financial modeling is more like playing out scenarios to see what might happen if everything goes as planned. It’s kind of like a special tool we use for specific purposes. People sometimes mix up financial forecasting and budgeting, but they’re not the same thing. Financial forecasting is about guessing how well a company will do in the future in terms of money and other stuff. Budgeting is more like setting money goals for the future based on our forecasts and other info. Simplify your business finances with Monily’s accounting and financial solutions. Contact our team of experienced professionals now for personalized assistance or book a complimentary consultation today. 

Also Read: Profitability Models – How They Help In Forecasting The Future

Farwah Jafri

Farwah Jafri is a financial management expert and Product Owner at Monily, where she leads financial services for small and medium businesses. With over a decade of experience, including a directorial role at Arthur Lawrence UK Ltd., she specializes in bookkeeping, payroll, and financial analytics. Farwah holds an MBA from Alliance Manchester Business School and a BS in Computer Software Engineering. Based in Houston, Texas, she is dedicated to helping businesses better their financial operations.