Why Is Financial Forecasting So Important?
For growing businesses, a lack of focus on the financials is one major pitfall. Strategizing and product development are no doubt exciting but the finance and accounting team are truly the wind beneath the wings. So, if you have gotten this far without financial forecasting, it’s great but that does not mean you continue down the same path in the future. Incomplete financial statements and forecasting or lack one can lead to disruptions in cash flow, lowered valuations, problems obtaining credit and other major issues.
Now, strong financial forecasting does not have to be elaborate; rather it must be comprehensive, consistent, and data-driven. Here, you can know more about the basics of financial forecasting and budgeting which will improve financial reporting and keep your growing business on solid ground.
What is Financial Forecasting?
The process entails making educated guesses about future periods by using past financial data and current market trends. A vital part of the planning process, effective forecasting helps in informed decision-making. It is a blend of creative evaluation and quantitative insight; you plan for what comes next depending on what you know or have and what you believe could take place in the near term.
Factors that affect forecasting can be both predictable such as business expansions or economic changes and unforeseen such as natural disasters or stock market corrections. For the latter, forecasting can help in establishing contingency plans. Now, it is true that even effective forecasting cannot account for every pitfall like a global pandemic; but it can cushion your business from the impact of outlier events and help it grow during good times.
Budgeting vs. Financial Forecasting
Now, there are different models of forecasting and each has its application. So the one that will suit your business will be different from what might help another. But in general, some top models help businesses:
1. Static Budget
Also known as “forecasting to the wall”, this traditional model helps forecast expected expenses and revenue for a single period which is usually for 12 months. Though the time horizon remains fixed, the projected revenue and expenses are amended over the current period. The amendments are done in smaller increments as you approach the end of the period.
2. Rolling Forecasts
As the name suggests, this is a dynamic approach to financial planning. In this case, the forecasting is conducted over shorter periods (usually it is done quarterly) and each time, the reports are reviewed for any potential adjustments. A major advantage of this type of forecasting is that you can engage in less intensive but consistent budgeting and forecasting processes.
Why Do You Need Financial Forecasting?
It is fundamental for every financial decision your company will make in any given period. With strong financial forecasting practices in place, you get better financial results, a more stable cash flow, and better access to investment and credit that will aid your company’s growth.
Following are how forecasting has helped businesses:
1. Provided the basis for budgeting
Remember that many people call budgeting forecasting. But the two are different processes with different goals and forecasting is where it all begins. Using known data, it predicts and influences future events that are yet to happen.
2. Created Accountability
When you have a plan in place, you can measure your goals and progress for stable financial performance.
3. Better Evaluation of Risks
As we said, mitigating unforeseen instances or outlier situations by creating contingency plans is a significant function of financial forecasting. Now, full mitigation is not possible but the impacts can be reduced so that the recovery is better and quicker.
4. Helped in Strategic Decision-making
With better access to data and a well-made plan, stakeholders can make informed decisions about their investments and strategies. Forecasting relies on precise historical data and correct future potential so that decisions are not made randomly.
5. Consistent and Planned Growth
Forecasting allows you to optimize spending so that your money is used to get more money. Successful growth cannot be left to chance!
So now that you understand how financial forecasting can elevate your business and keeps it going on full steam, how about partnering with experts for the right guidance? With BGES, you can make the most of your historical data and insight for a successful future!
Also, Read: Supply Chain Issues In Small Businesses
