Financial Forecasting 101: Fundamentals for Business

Running a business and uncertainty go hand in hand, and unfortunately, there are many factors that are beyond your control such as changing market trends and economic factors. One of the easiest ways to prepare for the future is through financial forecasts. When was the last time your company put together a financial forecast?

What Is Business Financial Forecasting?

Financial forecasting is an outline of the financial projections of your business that can help facilitate future financial outcomes and decisions for your business. This process considers your financial statements, historical data, cash flow statement, and other relevant factors that contribute to your financial performance. Some financial forecasting methods can change depending on the type and purpose of the forecast. 

Why Is Financial Forecasting Important for Your Business?

Without a financial forecasting process, it detracts from your ability to set your company up for success. Here are only some of the benefits of financial forecasting.

How to Do Financial Forecasting: 7 steps

The accuracy of your financial forecasting cannot be overstated. There are essential facets of your company’s current and future operations that hinge on these results. Here is a list of steps to ensure accuracy.

1. Define the Purpose of a Financial Forecast 

What information are you hoping to learn from this forecast? Maybe you want to understand how many units of a product you’re going to sell or you want to understand what your future budget will be. Before you get started, make sure the purpose is clear.

2. Gather Past Financial Statements and Historical Data 

You’ll also want to collect and analyze various parts of past financial data such as revenue, liabilities, losses, fixed costs, equity, investments, earnings per share, expenditures, etc. Make sure to take the time to put together these numbers, factoring in all relevant data to produce an accurate result.

3. Select a Time Frame for Your Forecast 

How far into the future do you want to look? This could be anywhere from a few weeks from now to a few years from now. Keep in mind that the closer the time period, the more accurate the forecast will be. The majority of companies put together forecasts for one fiscal year.

4. Determine a Financial Forecast Method 

As we discussed above, there are two main methods: quantitative and qualitative. Each is ideal for different scenarios and both have strengths and weaknesses. Generally speaking, qualitative forecasting is ideal for startups as they don’t have past data as a reference point.

5. Document and Monitor Your Results 

Make sure to document the results over time as there’s no such thing as 100% accuracy. Keep your forecasts updated as the latest developments unfold.

6. Regularly Evaluate Financial Data

To determine whether your forecasts are accurate, you’ll want to analyze them regularly. This will also help you better prepare for the future.

7.Repeat Based on the Established Timeframe

Conducting these forecasts regularly can help you stay in better control of your company and assist with financial modeling and financial planning. This is going to be an ongoing process and although it is tedious, it is worth it in the big picture of your company.

How Cultivate Advisors Can Help

As you can see, financial forecasting is an integral part of your long-term business success. If you aren’t sure where to begin or you have questions about how to go about this process, our financial forecasting consultants at Cultivate Advisors can assist you! We are highly experienced in working with many different business types and sizes and can give you peace of mind. Call us today to schedule an initial session!