One of the most important tasks of a small business owner is planning for the growth and stability of the business. The best way to do this is with financial forecasting, which is the process of predicting your company’s performance. This is done by considering the historical data of your company as well as the current industry trends.
If your business is located in Southeast Wisconsin, Nolan Accounting can help with your company’s financials. We offer a variety of financial services including accounting, bookkeeping, payroll, and tax prep. In this article, we’ll explain the three types of financial forecasting, as well as the steps involved.
3 Types of Financial Forecasting
Financial forecasting can be used to predict the performance of several areas of your business including:
Sales
Sales forecasting is used to predict future sales volumes and then use those predictions to determine how much revenue your business will generate within a specific time period.
Budgeting
Budget forecasting is used to predict future revenue and expenses to determine if your budget is reasonable and to keep you on track.
Cash-Flow
Cash-flow forecasting is used to predict cash flow in and out of your business. This is especially useful in planning/preparing for upcoming expenses.
6 Steps to Financial Forecasting
Below are the 6 steps involved in financial forecasting:
Set Your Goal
The very first step is to determine the purpose of your forecast. Common goals include:
- Determining if your budget goals are reasonable
- Ensuring you’re on track to meet your budget goals
- Estimating the impact of a particular trend such as interest rate fluctuations
- Predict income/revenue to present to stakeholders and investors
- Make financial decisions that impact the growth and stability of your business
By understanding the purpose of your financial forecasting, you can determine the metrics that you want to focus on.
Establish Time Frame
A financial forecast should encompass a specific time period and, as the business owner, you can choose the time frame you want to focus on. Most business forecasts encompass a year- but if you have a more volatile business, you may want to do a quarterly or even monthly forecast.
However, it is important to note that the further out you forecast, the lower your accuracy because there is more time for outside factors to influence the results. The age of your business will also have an impact on your predictions. An older business has more historical data and growth patterns to pull from. A newer business doesn’t have as much data to pull from, which makes it harder to project long-term.
Choose Forecasting Method
There are several forecasting methods to choose from:
- Straight-line
- Moving averages
- Simple linear regression
- Multiple linear regression
When choosing a method, it’s important to consider the expertise of your team and the software you will be using. If you do not have a background in statistics, you may want to stick with either straight-line or moving averages.
Gather Relevant Data
Financial forecasting involves historical data including:
- Revenue
- Sales volume
- Investments
- Average purchase value
- Fixed and variable expenses
- Lifetime value of customers
- Sales conversion rates
Most of this information can be found on your balance sheets and/or income statements from previous years.
You will also be using current economic factors and industry trends to make predictions about what will happen in the future.
Run Forecast
Once you have gathered all of the pertinent information, you will create your financial forecast. You can run the forecast several times, varying your assumptions to predict several potential outcomes.
By making several different predictions, you can prepare for the unexpected from slow growth to higher-than-expected growth.
Monitor Performance, Make Adjustments, and Repeat
If there are any major changes in your business or the industry as a whole, you can update your predictions. When you do create a new projection, be sure to consider the accuracy of previous projections to help increase the accuracy of future ones.
Let Nolan Accounting Help with Your Financial Forecasting
Every dollar counts when you’re running a small business- especially if you’re still trying to generate a profit. Financial forecasting can help keep you aware of the performance of your company and help you identify and address any risks before they have a major impact on your business. If you are located in Southeast Wisconsin, let Nolan Accounting help with your small business financials. Schedule a consultation today to see what we can do for you.