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Building a financial forecast

We will continue the financial advisory month by talking about how to build a financial forecast this week.

Although financial forecasting is part of the business plan, companies should also try to create a financial forecast/projection every quarter in the year. This will help the company manage any unwanted financial risks that may arise because they have already planned for them, resulting in a financially buoyant company.

For a company's strategic planning, organisation, and management, financial forecasting is a valuable asset. Unlike financial plans or budgets, a financial forecast does not need to be utilised as a planning tool.

Importance of financial forecast

  • It enables a firm to take control of its cash flow and move in the proper direction.

  • This enables a corporation to obtain bank loans and other forms of finance from a variety of financial organisations.

  • It acts as a guide for the firm, indicating its financial status and viability.

Factors to consider when building a financial forecast

When a company is preparing a financial forecast, it should take into account a variety of factors since they might have a significant impact on its business. Some of these factors include:

Demographic shifts - shifts in household income, age, and other factors might affect financial forecasting. Companies should carefully consider how this will affect them.

Technological developments - Since technology advances, businesses should always stay on top of the latest trends, as this has a significant influence on their bottom line. The good news is that technology advancements might be gradual, giving you time to adjust.

Economic environment - When preparing a financial projection, businesses should consider the current economic situation. They should consider inflation, market demand, and other factors. Consumers are less likely to be apprehensive about purchasing your products and services if the economy is expanding. The local economy, on the other hand, may have a greater impact than the national economy. Some cities, for example, have a stronger property market than others.

Seasonal factors - Seasonal cycles exist in several companies. For example, during the Christmas season in November and December, the retail industry generates a significant amount of revenue. On a monthly and quarterly basis, these seasonal fluctuations harm your financial projection, but they tend to smooth out in an annual estimate.

Industry state - When preparing a financial projection/forecast, you need to consider what experts expect for the economy and your industry in the future.

Competitor environment - Keep a keen eye on your rivals. If you don't adopt more active marketing methods, your sales may suffer because of new competition. Current competitors might cut into your consumer base by increasing their marketing efforts or launching new items.

How to build a financial forecast

  • Determine the forecast's purpose by examining how it will be utilised and the level of precision required. Others can be added, such as the time and effort that will be put into making the prediction.

  • Compile precise data on the company's income and spending for the current year.

  • Decide on a projected time frame.

  • Decide on a mechanism for generating the prediction. (For example, the straight line, moving average, Delphi technique, and so on.)

  • Hold data collecting and analysis team meetings. It's beneficial to have a two- or three-month forecasting strategy in place.

  • Make a note of the forecast and its results. Use the forecast's findings to project cash from operations, which may subsequently be used to build a cash flow report that looks forward.

  • Repeat the process based on your estimated time frame and evaluate the efficacy of your efforts.

At the end of the day, the more precise your prediction, the easier it will be to plan your business's future and think quickly. Plus, if you are seeking funding, you will need a financial projection to track your company's progress and to wow investors and lenders by demonstrating that you've thought of (nearly) everything.

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