Methods of financial forecasting explained
Businesses can’t gaze into a crystal ball to see the future.
But they can turn to methods of financial forecasting to help offset pressure, plan critical strategies, and more - even the introduction of helpful solutions such as asset finance in the future.
According to Forbes’ Business Council, “without any sound financial projections, any business plan is merely conceptual” - making them an essential planning tool for any SME.
Tackling the financial aspects of any business plan can feel daunting. But when you’re faced with uncertainty, financial forecasting can help you feel more in control of your market and operations.
These critically useful predictions keep your business clear of any potential influences, so you can effectively ‘future-proof’ your finances for optimal performance.
In this guide, experts here at Time Finance will provide a concise overview of financial forecasting and its most useful techniques. By the end, you should be familiar with the main methods, so you can confidently introduce forecasting into your financial plans.
At a glance, we’ll cover:
- What financial forecasting is
- How important it can be for SMEs
- The main methods and techniques
- Budgeting, projecting, and forecasting
- How Time Finance can help your financial plans now and in the future
If your business is thinking of taking on an alternative financial solution ahead of your forecasts - or as a result of one - we can help.
Our finance solutions help alleviate stress or open exciting avenues for your business, through working capital injections, asset acquisitions, and much more.
To find out more about our range of flexible finance options and how they could benefit your business, get in touch with our dedicated team today.
What’s the definition of financial forecasting?
When it comes to determining future business performance, financial forecasts are performed to help you make clear and informed decisions.
Analysing the past performance of the company, current business trends, and other relevant factors are just some of the factors that can go into your financial forecasting strategy.
Forecasting not only helps companies address business issues and capture opportunities, but also provides a shorter feedback loop, so you can:
- Spot new gaps in the market and launch new services
- Manage rising costs
- Improve and manage cash flow
- Deliver or reposition a business strategy
Financial plan vs. forecast
A financial plan is a strategic way of looking at finances - one that marks out a path that your business should stick to. A financial forecast is an estimate of future outcomes.
These are created through several methods, including using statistics and solid data to make projections, rather than creating suggestions.
Although a forecast can be used to support a plan, it’s important to note that these are not interchangeable terms.
Who can utilise forecasting techniques?
Every business will want to know what to expect in the future.
So to help you plan ahead, regular financial forecasting can give you sound and solid predictions of trends, demands and more - whether you’re an SME or even a larger-scale company.
Financial forecasts can give everyone within your company the foresight to make strategic choices.
These techniques can help you cope with multiple issues, such as seasonality, demand changes, price-cuts and competitive retailing choices, strikes and economic shifts.
They can also support operational functions - especially for business owners who work closely with sales and their ‘ground floor’ levels.
Ed Rimmer, CEO of Time Finance said, “Financial forecasting and planning gives you the opportunity to quickly optimise channel plans, promotion, pricing levels and even spend on marketing activities - using demand and supply dynamics drive growth.
“It gives businesses the chance to spot new opportunities in the future, or safeguard operations in a rapidly changing and competitive environment.”
So, how can you use these methods effectively?
Let’s find out.
The four methods of financial forecasting
If you’re struggling to choose the best forecasting method for your business, it’s best to start with the following question:
What do you want to forecast and why?
Once you’ve outlined your reasons, start exploring the following methods of financial forecasting.
Sales forecasting focuses on the amount of products or services the organisation expects to render within a certain sales period.
This particular forecasting method has many uses, helping to budget and plan crucial business resources and even production cycles. It can also help companies manage and allocate these materials more efficiently.
Cash flow forecasting
As the name suggests, the process of forecasting cash flow is all about estimating the flow of funds in and out of the company over a set period.
Expenses and income are the main factors, helping to identify immediate funding needs and budgeting, as the short-term accuracy of cash flow forecasting is most important.
A budget creates a concrete financial guide to help shape your business’ future.
It creates certain expectations about performance and provides a useful ‘yardstick’, determining the ideal outcome of a budget - if everything continues as expected.
It’s important to note that this method relies on accurate budget data, which in turn, relies on financial forecasting data.
Income forecasting takes your business’s past revenue performance and current growth rate, to help chart potential future income.
It’s a crucial part of cash flow and balance sheet forecasting, which can also be used by people across the business such as:
- Third parties
For example, financial providers like ourselves at Time Finance, may use it when processing your applications to help us get a bigger picture of your goals and financial situation.
Creating a financial forecast for your business
Many integral aspects of your company's current and future operations hinge on the results of your financial forecasts.
As such, accuracy cannot be overemphasised. To make sure you get it right, our experts have put together a step-by-step guide to financial forecasting.
Defining the purpose
First, ask yourself the following questions:
- What do you hope to learn from the financial forecast?
- Do you need a solid estimation of how many products or services can be sold?
- Are you aiming to see how the company's current budget will shape its future?
Financial forecasts should always have a clear purpose, with the needed factors and metrics outlined beforehand.
One of the chief components of financial forecasting involves analysing past financial data and historical documents.
This can be tricky if you are in the early stages of your business with a small paper trail, but relevant records can include:
- Earnings (complete and split by share)
- Fixed costs
- Investments and equity
- Comprehensive income
Getting the timing right
Financial forecasts are created to give business owners a glimpse into the company's future - which gives you the power to decide how long or short your timeline needs to be.
These range anywhere between several weeks to several years, but most companies do forecasts for one fiscal year.
As factors such as business and market trends change, so do financial forecasts - which is why it’s important to note that any type of financial forecast is more accurate in the short term.
Examining types of financial forecasts
There are two go-to methods of financial forecasting.
Each one has different uses with its own benefits and weaknesses, but qualitative forecasting is usually more suitable for startups or smaller businesses that might not have a wealth of data to rely on.
This method utilises historical information and data to pick out trends, reliable patterns and other identifiable factors in your business’ past documents. It focuses on ‘concrete’ data.
On the other hand, qualitative methods rely on expert opinions and reports about the company and market as a whole.
Keep an eye out for your results
As financial forecasts are subject to change over a period of time, you should make sure you keep an eye on your results.
Take care to document and monitor after any big internal and external developments (an automated software might be able to help with this) - as your forecasts will require an update after each one in order to remain accurate.
Analyse the data
Regularly checking and analysing your data is the best way to tell whether your financial forecasts are accurate.
As such, maintaining financial analysis and management can help you prepare for the next financial forecast, while giving you fresh and useful insights into your business’s current performance.
Rinse and repeat
As businesses should carry out regular forecasting to get a better overview of their finances, making sure the process is repeated in the long run is advisable. This can help you get a rolling forecast into the future, especially after your current one elapses, so your business can stay on top form.
Ed Rimmer, CEO of Time Finance adds, “It's also smart to carry on collecting, noting, and analysing useful data to improve your financial forecasts' accuracy along the way.”
Improve your cash flow with finance solutions from Time Finance
The Time Finance team has years of shared experience working with businesses of all sizes and from a wide range of industries to provide reliable and effective business finance solutions that prioritise their cash flow management needs.
We pride ourselves on our relationship-driven approach, taking the time to get to know each of our clients on a deeper level to ensure we're delivering the best solutions for them.
To find out more about how Time Finance can support you and your business with a variety of solutions, get in touch today.