A financial forecast is a tangible real-world version of a crystal ball for your business’ ongoing success. Regardless of the type of business you own a financial forecast is an integral tool for predicting income, expenses and needs. Large retail corporations, small music/photography studios, medical facilities and hardware stores all benefit from building a financial forecast.
Financial forecasting and budgeting are commonly confused/interchanged by business owners today. Knowing the difference between each helps you use both to the overall advantage of your business. Financial forecast templates are available online as downloads. Professional forecasting services/software are available for purchase. Read ahead to learn valuable information about improving your financial forecast in 2021.
Financial Forecasting 101
Financial forecasting is the prediction of your company’s financial standing over set periods of time. Financial forecasts are built for timelines ranging from short-term through long-term and any length in between. Every business has goals, which rely on financial forecasting to predict all needs and potential obstacles to success. Branches of probabilities are created showing what your future business will look like financially based on different sets of circumstances/decisions. Percentages of success are generated as multiple outcomes based on varying predicted influences.
Advanced financial statements, referred to as pro forma statements are used to organize and solidify forecasted predictions. Pro forma statements are categorized into multiple types, which cover different information/timelines. Statements and predictions built via financial forecasting also used to attract investors and secure financing for working capital and expansion purposes.
Comparing Financial Forecasting to Budgeting
Creating a budget and building a financial forecast are concepts mistakenly confused and interchanged by some business owners. Budgeting and financial forecasting each has similarities with the other but also distinctly different purposes for the endgame your company. Financial forecasting involves the prediction of potential future financial outcomes. Budgeting involves creating a plan based on the information gathered from financial forecasting predictions.
Financial forecasting uses and combines data from your company’s past performances, current market trends and future potentialities. This data helps predict revenue surpluses and/or shortages. Budgeting and financial forecasting work seamlessly together. For example, a predicted $10,000 annual revenue surplus will be spent based on plans created in a new budget for the subsequent year. A forecasted $2,000 shortage in revenue during one fiscal quarter will be re-budgeted for replacement from surplus revenue in subsequent quarters, etc.
Pro Forma Statements
Multiple pro forma statements are used in financial planning for businesses today. Three primary categories of pro forma statements are used with prevalence, however. Income statements, cash flow statements and balance sheets are the three most important types of pro forma statements used in financial forecasting in 2021. Pro forma statements are created for months and years in advance. Income statements show the profitability of your business. Cash flow statements reports the amount of cash your business intakes and spends. A balance sheet is the primary pro forma statement required to attract investors and obtain financing for future operations. Balance sheets display the big financial picture of your business including its:
- Net worth.
- Cash surpluses/savings.
- Location of asset locations and accounts.
Benefits of Financial Forecasting
Financial forecasting is essential to the operation and success of your company. Benefits are immense when financial forecasting is utilized to full potential. Financial forecasts allow your finance department(s) to create realistic plans/goals for the future. New businesses rely heavily on financial forecasts to obtain necessary funding and plan feasible expansions. Shareholders, stakeholders and leaders of established companies are able to make informed intelligent decisions based on predictions generated via financial forecasting. Financial forecasting provides comprehensive reports, seamlessly integrating information from past and present performances into future performance predictions. Additional benefits of using financial forecasting for your business include:
- Creates a reliable foundation for vital budget-related decisions.
- Prepares your business for increased demand of future services.
- advanced planning for potential worst-case situations.
- Establish credibility with investors, lenders and stakeholders.
- Prepares for any events affecting revenue.
- Creates a baseline of reasoning for financial decisions based on multiple branches of potentialities.
- Increases internal company awareness of multiple variables w/short and long-term impact.
- Keeps business owners and company leadership knowledgeable about possible events, which bolsters leadership culture and advantages over competition.
- Improves profitability by preventing mistakes and taking advantages of positive trends.
Make the Most of Your Financial Forecast Approach
Financial forecasting is a proven method of increasing the success of a business. Successful financial forecasting is an ever-evolving process, however. Markets and consumer demands are constantly fluctuating and approaches to financial forecasting must include oversight, flexibility and a willingness to adapt. To make the most of your financial forecast approach you must compare forecast predictions to actual data once each forecast period has concluded. For example, if your financial forecast predictions covered one fiscal quarter it is essential to compare those predictions to the actual results experienced once the applicable quarter has ended. Differences between forecast and actual results require compensation and adjustments for the next forecast period, which are necessary to improve on and/or eliminate miscalculations.
Understanding your business model and the market factors driving its performance are key elements used for successful financial forecasting. Information and data are important but are useless if also inaccurate. Successful financial forecasting therefore requires the use of accurate data and full comprehension of what it means for your business.
Use the history of company performance results to reverse engineer financial forecast models for future performances. Historical data is accurate and gives you baseline confidence in your prediction process. This is especially important when new risks or changes are introduced to forecast timelines for variable outcome branch comparisons. Effective financial forecasts include a mission statement about their purpose, usage and required degree of accuracy. Finally, all variables having the potential to affect performance outcomes must also be documented, in addition to:
- Best/worst-case scenario comparisons.
- Available resources to ensure success.
- Actions required to reduce risks/maximize opportunities.
- Potential obstacles to success, regardless of size or probability percentage.
Best Financial Forecast Templates Available Online Today
Microsoft Excel and Google Sheets both offer free financial forecast templates available for download online today. Score.org provides a Financial Projections template as well as balance sheets, cash flow, loan request and other pro forma statement-related templates. Additional financial forecast and pro forma statement templates available online today are provided by: