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- 01 Aug 2023
Financial Projections: An Extensive Financial Forecasting Guide
Writing a proper business plan is a must for all business owners; it is always said because, as same as life, business is also uncertain. A lot of factors are out of your control that can influence the market in a positive or negative way. That's why every business needs to do Financial Forecasting. Do we introduce you to new terms?
Ummm, don't worry. Read this guide and grab all the important knowledge about Financial Forecasting.
Financial Forecasting: Description
Financial Forecasting or Financial Projection is a process of predicting a business's Performance in the future. This prediction happened on the basis of past business performance, current trends, and various other relevant factors. Any company opts for Financial Forecasting when they know that it needs a proper method to:
- Understand the Performance of a company.
- Compare the budget provided to the Actual budget that is spent.
- Find the main areas that are deviated from actual expectations.
Why Financial Forecasting is Important?
See, if you want to know about the benefits you get from financial Forecasting, you have to understand that your Company is going nowhere without it. Financial forecast report benefits you in many ways.
- Setting up a realistic Business goal.
- Creating an Annual Budget
- Minimizing the Financial Risks
- Finding out the problematic area.
- Attract more investors
What are the Steps Involved in Business Financial Forecasting?
Now, once you decide to opt for Financial Forecasting, we have to learn how to do it.
Note: You already know a lot of aspects of your Company's future and present operations depend on the Financial forecast report only. Thus you have to do it in a proper and well-managed way.
1. Recognize the purpose of Financial Forecasting
Why are you doing Financial Forecasting? What are your Expectations from the forecasting report? Want to learn how much profit you will make, or do you want to understand the future budget of the Company? Initially, you have to identify why you want to do the Forecasting, and then only you can move forward.
2. Collect all the previous Bank statements and historical financial data
Once you identify the purpose of Financial Forecasting, you can move ahead and collect all the important past historical financial data and records, like Revenue, losses, liabilities, Investment, equity, expenditure, earnings per share, and fixed costs. This is done to ensure the accuracy of your Financial Forecasting properly.
3. Decide a time frame for your Forecast
The Forecasting will explain the Company about its future. Now, it depends on you how far into the future you want to go. It can range from a few weeks to several years.
Note: Most of the organizations do it for one fiscal year only. It is because market trends change frequently.
4. Select a Financial Forecasting Method
You can prepare your Company's financial forecast report in two ways:
- Quantitative Forecasting uses all the past information and data to recognize future trends and reliable patterns.
- Qualitative Forecasting analyzes experts' opinions related to the Company's market.
Each method has its own significance. However, qualitative Forecasting is preferred mostly by Startups.
5. Documents and Monitor the results
Financial Forecasting can't be 100% apt. It changes over a period of time. Thus, you need to document and monitor your Forecast frequently. Update it according to the latest development (Internal or external).
6. Inspect the Finial Data
If you examine your Financial data regularly, you can easily find out if the financial forecast report is accurate or not. Moreover, this will also help you in creating a financial report for next year.
Apart from that, it helps you understand what the sets of trends that can be beneficial for your Company to repeat next year are.
What are the Types of Financial Forecasting?
After understanding the steps in forecasting financial statements, we can now learn the different types of Financial projections.
- Sales Forecasting: Sales Projection or Forecasting gives you a prediction of the total quantity of Services or products the Company expects to sell within a fiscal period of time.
- Cash Flow Forecasting: It predicts the flow of cash in and out of the Organization over a set of Financial time.
- Budget Forecasting: It determines the ideal result of the budget by assuming everything goes as per plan.
- Income Forecasting: This is used to estimate the future of the Company on the basis of past revenue performance and present growth.
So, are Financial Forecasting and budgeting the same? No, Although these two are similar, there are some major differences. Let's understand that in the next section.
What is the Difference between Financial Projections and Budgets?
|1. It projects the Company's future direction||Budgeting gives you an Outline of spending to reach your goals.|
|2. Forecasting is the initial stage, but it is prediction based.||It is Actionable.|
|3. Flexible and adjustable according to Company's requirements and environment.||Not so flexible; it can be adjusted if there are some modifications in the initial statement.|
|4. Tell the future economic status of the Company.||Works mainly on the Current status of the Company.|
5. Different types of Financial projection:
Different types of budgeting include:
To plan a successful Business, Financial Forecasting, and Budgeting both need to be accurate, as both are related to the capital you are going to spend. Further, if you think we missed something, please ping us on firstname.lastname@example.org and tell us what we can add more to help people understand Business Financial Forecasting in a better way.