There are multiple potential benefits of forecasting in business that will help businesses to prepare and plan for the future. We take a look at how powerful forecasting can be and how effective planning can be key to business growth and success. 

What is a financial forecast?

In its simplest term, a financial forecast is a calculated view of what a business’ key financial figures are expected to look like at various points in the future. Accurate financial forecasts use not only historical data to look at past performance patterns, but can also take into account potential key business decisions to predict how that will affect the figures.

What are financial forecasts used for in business?

Accurate financial forecasts can be used at every stage of the business lifecycle. They can be used as part of initial business plans when the company launches, as an ongoing basis for making key business decisions and should be updated regularly to ensure that the information is as accurate as possible. 

With an accurate and up-to-date financial forecast, a business can make informed decisions about things like staffing levels, price adjustments, whether to pursue new opportunities and how to best grow the company. 

Are financial forecasts reliable?

While no one has a crystal ball and can predict the future with 100% accuracy, financial forecasts that are based on data (rather than speculation), can be an excellent indicator of future performance, especially when they take into account things like seasonality, relevant emerging trends and other potential scenarios. 

Forecasts in business look at prospective situations that could have a significant impact on the company and assess how they would affect the figures. For example, what would the effect be if we expanded the team with four new hires? Or what would it do to our figures if we were to lose a specific contract/customer?

This approach to financial forecasts in business can mean that you are as prepared as possible for any potential bumps in the road or whether you can take a risk with unexpected opportunities, if they arise. 

Some of the areas included in financial forecasts

Your financial forecasts can be tailored to your specific needs as a business, but some of the common elements included often are:

• Cost forecasts – which calculates what your fixed costs and variable costs are likely to equate to e.g. rent, payroll, staff costs, estimated sales etc.
• Cash flow forecasts – which predicts financial performance based on the balance sheet, past statements and sales projections to estimate what cash flow will look like at any given point.
• Asset and liabilities forecasts – which calculates the expected tax liabilities, trade debtors and any fixed assets the company is expected to have at that point.

Other benefits of forecasts in business

Effective forecasting enables a company to:

• Set achievable targets and determine what ‘success’ looks like for the business in the forecasted time period.
• Identify potential problems or weak points financially, before they occur.
• Provide the basis for a valuation of the company.
• Mitigate financial risks with information about predicted cash flow and thresholds for spending.
• Provide information to potential investors.

Financial forecasting in business needs to be done correctly in order for the results to be accurate and reliable. PW can help you with robust forecasts and budgets that will help inform and direct your future business decisions and growth. 

Get in touch to find out more about how we can help with your forecasting needs.