Financial forecasting is usually performed to project a company’s failures and success. It also helps to predict potential threats and how they can impact your bottom line. It is important to note that the predictions may not always be accurate but financial forecasting is a vital component of business planning. Investors can also use the information to determine if your company is a good investment for them. However, forecasting isn’t always easy, especially if you’re unused to doing it yourself. If you are about to carry out financial forecasting, here are 5 great tips you can apply.
1. Plan for Both Good and Bad
One of the most common approaches is to come up with conservative assumptions and forecasts. This is a practical way to begin the forecasting process. It is necessary to have a worst-case scenario in mind when you are planning but you need to think about the best-case scenario as well. This means that you need to come up with several versions of forecasts. If you want to plan for the short-term, analyse your company’s growth month-to-month starting with the previous year. This will give you a great foundation to forecast revenue fluctuations in the upcoming months, giving you a much better accuracy as you’ve taken into account models of what has happened in the past.
2. Begin with Expenses
Financial forecasting should begin with the company’s expenses instead of revenues. This is particularly important if you are operating in a very dynamic industry. If your industry tends to evolve frequently, it will be easier for you to predict your expenses compared to revenues. It will also allow you to look at where costs can be cut, and you can make recommendations about how to go about it.
3. Forecast Several Times a Year
You need to forecast your finances more than once a year especially when the economic conditions seem uncertain. Try to come up with a complete forecast close to the end of the year to ensure they are relevant, and you can use these for planning for next year. You can also come up with forecasts each month. This may take time but regular forecasts ensure your plans are based on accurate information, and you’re in the right position to take advantage of opportunities or minimise risks.
4. Include all the Basics
Your projections have to cover all the basics. You need to include gross profits, income tax provisions, continuing operations income, discontinued operations, and net income. Your financial forecasting also needs to factor in summaries that are made by your accountants. It is also important to consider the accounting policies they applied to come up with the figures.
5. Understand your Business
This is critical if you want to come up with effective financial forecasts. You have to know the things that drive your revenues and expenses. Use your cost and revenue drivers to make projections.
Financial forecasts should be helpful, practical, and straightforward. Examine your company’s core business and demonstrate a path that will lead to profitability. If you realise that things are not working as well as they should, it is time to re-examine your drivers and come up with plans to help you attain profitability. You have to be realistic when forecasting even when you believe in the services or products that you offer. The projections you make have to be helpful to allow you to make the right decisions. Your forecasts should be able to inform you about your profitability and the specific variables that need to be altered to increase profits. Take advantage of these tips to come up with useful forecasts that will see you do business better, or contact a company that provides financial services in Australia in order to get a good financial forecast tailored to your needs.