“I predict it’s quiet. I predict we buy it!”
Thankfully financial forecasting for your business doesn’t have to be left to chance predictions.
In this business blog post are our insights on why business financial forecasting is integral to the success of a business. Plus six reasons for using financial forecasting frequently.
Let’s begin with the correlation between budgeting and financial forecasting.
Budgeting Versus Financial Forecasting
There is a correlation between budgeting and financial forecasting. However, what they are not is different terms for the same activity.
As explained by Investopedia, budgets are the expectations, i.e., goals of what a business wants to achieve within a set time frame. For example, revenue, expenses, cash flow, and debt reduction goals for the next quarter.
The role of financial forecasting is to assist with the goal-setting of budgeting and determine whether targets can be met.
Using financial forecasting, a company looks at its financial situation and what’s happened in the business. With that data, management can create financial forecasts of future revenue and determine whether budget goals will be met.
Budgets may be created or updated once a year, whereas financial forecasting happens a lot more regularly, i.e., quarterly. Therefore it’s fair to say financial forecasting and budgets are the very heart of businesses.
Steps To Creating A Financial Forecast
Creating a financial forecast requires the following actions:
- Financial forecast timeframe
- Documentation and statements correlating to the timeframe
- Analysis of data – income, expenses, cash flow, balance sheets
6 Benefits For Of Financial Forecasting
What does your business need to use financial forecasting? Consider these six benefits for your business.
1. Allows realistic business goals to be established
One apparent reason to have a financial forecast is to know a close approximate or estimate of future economic outcomes for your business in advance. With greater insight into your financial position, essential investment decisions like increasing staffing or funding a big project can be business goals made with accuracy and confidence.
2. Helps to identify and avoid potential risks
By forecasting future income and expenses, businesses can identify any potential risk areas and then take the necessary steps to prevent them. Although no company is immune to financial risk, any problems can be dealt with by forecasting its financial performance before they become catastrophes.
3. Empowers better cash flow management
Accurate financial forecasting assists businesses in predicting times when more money is coming in than going out and vice versa. This information allows business owners to plan and prepare for ways to cover any shortfalls or make decisions about investing. If you need extra help and support, businesses like Xelix can give you tailored information and advice on financial forecasting.
4. A competitive edge
Contrary to contrary belief, forecasting isn’t just for smaller businesses or start-ups. Even well-established companies can benefit from financial forecasting. Quality financial forecasting can give a competitive edge over rivals.
By having up-to-date information about the overall financial health of their company, businesses are in a better position to make informed and intelligent decisions about where their resources would be best allocated and how the industry can be grown – information that is all valuable to investors, lenders, and stakeholders within businesses.
5. Helps to identify opportunities for improvement
Business process improvement is at the forefront of change within most businesses today. Investing in digital transformation is risky without accurate financial forecasts, which can assist enterprises strategically. For example, when to allocate resources to Industry 4.0 initiatives or expand geographically.
By clearly understanding the potential financial implications of these decisions, businesses can make more informed choices that will increase their chances of success.
6. Allows accurate long-term investment decisions
By predicting how much money the company will earn in the future, informed decisions can be made about whether now is the right time to expand or purchase new equipment. For example, if profits are likely to decrease in the next few years, a business might choose to cut costs or increase prices.
There are other reasons for using financial forecasting too. For example, choosing when to step away from your business or bring in an investor can be challenging but made easier with an economic forecast that supports your timeframe.
From the first day you open for business, data is being collected, and it can be put to good use for setting business goals and riding out harsh economic conditions.
Overall, there are innumerable benefits to financial forecasting – simply too many to mention in this business blog post.