Financial forecasts help you estimate how your business will perform going forward. It helps you to plan for and achieve your business’s financial goals as well as to set future goals.
What are financial forecasts?
Financial forecasts, as the term suggests, is a budget for your business. It is a financial plan that gives an estimate of your future income and expenses. This is extremely essential so that you can predict the health of your company.
The elements of financial projections help you project Profit and Loss statements, Balance sheet and Cash Flow forecasts for the near future. It is your financial roadmap to better plan your cash flow and other financial requirements. It is important to understand that financial planning is very important for the future health of any business. Business risk can be adequately handled with the help of good financial forecasting.
Why is Financial forecasting important?
Financial planning: If you are a new business, it is sometimes difficult to accurately predict the financial future of your business, as you do not have any historical data to fall back upon. Yet it is important to do so to plan appropriately. It is also important to match the forecasts against the actuals at the end of the month or Quarter in order to find out the inaccuracies if any and to correct them subsequently. This must be done for all businesses, new or old.
Funding: If you wish to apply for a bank loan or financial funding of some other type, you will need a business plan along with financial projections to boost the validity of your business idea. You need to always show how and when your company will begin making profits through your financial projections.
Future planning: Financial projections help you take your business in the right direction. What delivers and what does not often put your business on the right path. After all, every business keeps its eye on the bottom line.
Identifies trouble spots: Financial planning helps you address concerns like cash flow problems as well as other imminent risks that can endanger your business.
Tips to remember while doing financial forecasting?
Forecast all expenses and revenues: You can begin with expenses which include fixed expenses like Rent, Salaries, Overheads, Utility bills, Bookkeeping and Accounting, Telephone and others. The variable ones will include Marketing and Advertising, Packaging, Legal, Insurance and others.
And you can adjust your sales projections with latest data that you have.
Forecast taking a midpoint between conservative and aggressive estimates: This is a way in which you build in optimism into your forecasts. Ambitious forecasts can sometimes provide the spur you need to take your business higher. Of course, the ambition must be tempered with rationale.
Use caution: Sometimes focusing too much on revenues can make one lose focus of the expenses that may increase manifold. Get a reality check with key ratios like Gross margin and Operating profit margin to fine tune your projections.
Prudent financial planning is important to spearhead a company’s growth goals. Financial forecasting is a very handy tool that helps to do this financial planning.