A layman's definition of financial forecasting is to plan or forecast the financial budget for a business.
The main purpose of financial forecasting is two things - revenue and expenses.
Financial forecasting for a business is not a piece of cake but there are advantages if it is done early and consistently.
What Is Business Financial Forecasting?
Financial forecasting is a vital tool in businesses. It uses both past financial performances and current trends of the business to predict the future performance of the company.
Business financial forecasting helps management of the company to make adjustments in the production and inventory levels.
"The key for forward financial forecasting is not to predict the future, but to influence it"
Financial Forecasting vs Budgeting
Tools used by the companies for management and predicting the furture directions comprise financial budgeting and financial forecasting
The differences between financial budgeting and financial forecasting are,
- Budgeting is the outline of the direction that the company wants to take. While a financial forecasting reports if the company is reaching its budget goals.
Budgeting contains goals that are at times unattainable by the companies due to changing trends in the markets. Financial budgeting and financial forecasting should work in tandem with each other for a business to flourish.
6 Key Elements Of Financial Forecasting
The following elements make the financial forecasting for business.
- Monthly financial statements
There are 3 key pro forma statements that a simple financial forecast requries:
- The income statement
- The cash flow statement
- The balance sheet
- Risks and opportunities for the businesses
- Actions taken to minimize risks and capitalize on opportunities
- Resources available to bring forth the forecasting
- Potential obstacles arising during financial forecasting
- The financial forecast results - month-to-date
5 Things To Know About Business Financial Forecasting
Here is an overview on the factors that play a vital role in financial forecasting for business.
1. Business Promotions
If business financial forecasts are done properly with the best tools, the businesses can utilise the funding to further promote the company's capital ventures. This is considered to be one of the benefits of financial forecasting.
Business financial forecasting can also help predict success or failure of the company.
2. Estimation Of Financial Requirements
Estimation of financial requirements of the company uses financial forecasting.
Another benefit is that business forecasting can be done to determine sales and costs and simple estimations like determining the project capital etc.
3. Seamless Functioning Of Business
Effective business financial forecasting of the company that includes current revenue, revenue potential etc. will ensure smooth and best functioning of the company.
Data derived from a simple financial forecast is used to mitigate future roadblocks.
4. Overall Success And Informed Decisions
Accuracy in business financial forecasting will produce a strong base for budgeting departments. For example, based on a simple financial forecast on production estimation, the company can estimate the turnover rates.
Financial forecasting leads the management of the company towards the right direction which helps the organization to plan the best future for the business.
5. Control Of Cash Flow
Companies with best financial forecasting can have a good guaranteed cash flow. This will ultimately boost the business.
Such companies can know how much cash flow they require or otheriwse, using business forecasting.
Conclusion
Financial forecasting is a crucial part of business planning and execution. Unforseeable events can be mitigated and outcomes from such unprecedented events can be at its least with the help of business financial forecasting.
