Let’s start our “How to” series by talking about how to create a financial forecast.
The process of developing a financial forecast involves planning, creating, and executing the forecast, much like any other strategy in a company.
Planning
Planning to fail is the same as failing to plan, as the adage goes. One needs to make plans to increase the likelihood of success when making something as sensitive as a financial forecast., You need to:
Establish the goals and objectives of your financial forecast – This involves establishing the forecast's objective while keeping the desired result in mind. This can be derived from the company's objectives, vision, and mission. For instance, current data will be required if the objective of developing financial forecasts is to ascertain the business's financial health at any particular time. Highlighting at least three objectives for your financial outlook is a smart idea.
Determine likely outcomes – We now know that past financial information is essential for forecasting, therefore we must make plans for the future by determining how much prior data will be included in our forecast. How long is the forecast for? Knowing the forecast's objective and whether it's for the short- or long-term will help you estimate how lengthy the timeframe is.
Set targets – Setting goals for forecasting, regardless of the period of timeframe it is intended for, increases its effectiveness. You can begin to develop your forecast if you have specific objectives.
Creating the forecast
With a solid plan in hand, the next thing is to create the forecast itself.
Assess the financial viability of the business – this strategy includes compiling and assessing data from the company's key drivers, historical financial statements, and current performance. This paints a clear image of where to begin and how to incorporate the results of the investigation into a future projection.
Think outside the box – You occasionally need to put on your "green" thinking cap and imagine yourself in management, providing answers to key questions like What is the Business Plan? What goals may be accomplished in a given time frame?
Draft the forecast – It is now time to develop a forecast with a comprehensive grasp of the business's objectives and vision, its past performance, and any potential influencing variables.
Executing the forecast
This is where you turn your forecast into a valuable asset for management.
Double-check the work – In order to create the ultimate forecast, forecasters must analyse a large number of financial records, financial drivers, and assumptions. However, you should confirm the stated assumptions and projections.
Summarise the forecast – The forecasting process must be broken down to emphasise the key elements in order to make sense of the entire process involved. The purpose of a forecast, after all, is to assist management in making decisions. As a result, it must be simple to comprehend.
Use the information from the financial forecasts – Before the forecast can be viewed as a strategic valuable asset, it must be able to aid in decision-making.
Create a repeatable process – As projections, forecasts cannot be taken as fact. It should still be evaluated and modified to fit trends and expectations after being presented to management. As a result, the process never stops. The secret is to get good at recognising when and how to make adjustments to your financial forecast.
In summary, creating financial forecasts using financial statements is merely one aspect of creating financial forecasts. Additionally, it entails incorporating financial forecasts as a fundamental company process and employing it as a strategic tool to offer management insights.
If you need help to construct a financial forecast, please email us at enquiries@ovacgroup.com for a free consultation with our team specialists.