How to Use Financial Forecasting to Achieve Your Business Goals

Financial forecasting is important in the achievement of organizational objectives. It is the forecast of what a particular business will look like in the future based on estimates. Based on the historical trends and the advice from the experts, it is possible to set goals together with the ways to achieve them and necessary budgets. The focus of today’s post is the analysis of financial projections and their application in the attainment of business goals.

Financial Forecasting for Business Goals

Financial forecasting can be comprehended as the analysis of prior and current financial data to predict future trends. It provides knowledge that can be subsequently utilized to make smarter choices. Further, it helps the business create a strategy to prevent negative impacts by coming up with backup plans when a business experiences mishap like a decrease in its stocks, disasters, or temporary halts in its operations.

Forecasting involves both the computation of documented numbers and the evaluation of other elements. Knowledge and expectations are really important in helping you prepare for what is to come next. Forecasting here simply means the way in which organizations are unable to foretell or avoid all issues that are likely to emerge, including something as fundamental as the COVID-19 outbreak. Nevertheless, it is useful in moderating the impacts of unfavorable events and building on moments of growth and prosperity.

Financial Forecasting Models and Methods

Financial forecasting entails the use of distinct forecasting tools and methods to estimate the likely revenues in the future. Two financial forecasting models are discussed herein:

1. Top-down model for financial projections

It is one of the most commonly used financial forecasting models. It involves determining the overall size of the market and then estimating the revenue based on the percentage of the market. The method might not be completely accurate, but it can be a helpful starting point, especially for businesses that don’t have any past data.

2. Bottom-up model for financial projections

Instead of beginning with general market data, you consider your sales volume or units from the previous period and then multiply it by the price you anticipate charging for the upcoming period. This method is more precise, but it can take a lot of time. Additionally, any mistakes made during the initial calculations become more significant as the calculations progress.

These methods analyze past data, considering both internal and external factors, and generate outcomes that inform important financial choices. Organizations have the flexibility to choose from a range of forecasting methods based on their business needs and specific objectives. These methods can help improve accuracy and support better decision-making.

It is important for effective business management to use software tools and include forecasting in strategic planning. Effective communication with stakeholders and addressing common questions about financial forecasting are crucial for maintaining transparency and accuracy.

The following are some of the common financial forecasting methods that businesses use:

1. Straight Line

The method extrapolates future outcomes by using the average historical growth rate and applying it to the most recent data. Although this method is straightforward and can be easily grasped and implemented, its simplicity can also be a disadvantage when dealing with dynamic and evolving markets. It assumes that trends will continue without any changes, but that is rarely the case.

2. Simple Linear Regression

It is a more advanced version of the straight-line method, providing additional insights. It uses statistical analysis to make predictions about a dependent variable on the basis of the value of an independent variable. In a business context, sales can be considered the outcome that is influenced by various factors such as marketing spend, economic conditions, or competitor activities. Simple Linear Regression, although more complicated than the straight-line method, relies on certain assumptions. One of these assumptions is that there is a linear relationship between variables. However, this assumption may not always be valid in the complex world of business forecasting.

3. Moving Average

It is recognized and applied in financial forecasting and planning. It works by constantly updating the average of a specific number of previous periods, resulting in a ‘moving’ average. The method is effective at identifying general trends, but it may not respond quickly to new changes or deviations. It relies on historical data to make predictions, which means it is not as responsive to new changes in the market.

4. Multiple Linear Regression

It is a statistical method used to analyze the relationship between multiple independent variables and a dependent variable. It allows us to understand how these independent variables collectively influence the dependent variable. The advantage of this tool is that it can take into consideration the complex relationships between multiple variables, which makes it a more detailed and accurate forecasting tool. However, using this method also means that more data and computing power are needed. Additionally, it relies on assumptions about the relationships between variables. Although this method can be complex, it can still provide valuable insights for strategic business decisions when carried out by a trained professional.

Step to use financial forecasting for achieving business goals

If you prefer, you can use financial forecasting software to handle your projections. However, you can also choose to address them on your own without relying on software. Here are the steps:

– Have a clear understanding of your goals and objectives for your financial forecast

– Collect all the necessary information and data on revenue and losses, fixed costs, equity, and liabilities

– Decide on the duration of your forecast period. Your business’s forecast period will depend on its unique needs.

– Choose a method for financial forecasting. If you are doing calculations manually, the straight-line method might be the simplest option. However, you can also try out other methods if necessary.

– Perform your calculations and analyze the results.

Conclusion

Financial forecasting helps businesses make informed decisions, ensure future growth, and stay competitive. Businesses can use it to identify potential issues, assess the effectiveness of strategic initiatives, allocate resources more efficiently, and set realistic financial goals. Furthermore, having precise forecasts allows decision-makers to predict market changes, swiftly adjust to unexpected events, and reduce risks related to financial management.

Monily, a subsidiary of Arthur Lawrence, is here to help businesses improve their financial performance. Count on us to help secure your company’s financial future. Feel free to reach out to us if you’re looking to take your business to the next level.