One of the primary reasons for the failure of many small businesses is the lack of planning and control of cash capital. That’s why in order to avoid or reduce such business risk, an organization should not fail to undertake good financial forecasting.
Whether you are running a start-up business or a well-established company, knowing how to createa financial forecast can significantly improve the chances of achieving the short- and long-term financial goals you have set for your company.
By its name, one may easily think that financial forecast is a daunting and knowledge-intensive task. But with the right tools and thorough understanding of how it works, it is very doable even for beginners.
What is Financial Forecast?
According to GFOA, a financial forecast is a “fiscal management that presents estimated information based on past, current, and projected financial conditions.”When done right, it can help a business identify future revenue and expenditure trends that may have a direct or lasting influence in government policies, strategic goals, or community services.
There are a few financial documents that should be gathered and consulted when creating a financial forecast. These documents range from past records, cash-flow, financial ratios, and factors such as present economic conditions which could impact the business operations
That said, financial forecast is just one but integral building blocks of the annual budget process. Overall, it helps ascertain the business’ future growth, as well as help managers tocreate solutions that will help them overcome any financial impediments along the road.
Here are key takeaways from the infographic below which teaches us the fundamentals of creating a financial forecast:
1. Use different scenarios.
Having a forecast based on differentsituations can really be advantageous, especially if you are operating in a hostile environment i.e. changing government regulations, increasing number of new competitors, and stale economic growth. Doing so also helps you maintain flexibility in strategic planning, allowing you to react to financial obstacles much faster.
2. Start with expenses.
To make the process a lot easier, start building your forecast model by outlining your fixed expenses such as rent, utilities, salaries, taxes, insurance etc. Then identify the variable cost that could fluctuate with your revenue. Finally, estimate the cost you can slash out without much impact on your operations when your business is rough.
3. Identify your assumptions.
To manage these assumptions and avoid bias, list down all the assumptions you can think of that can affect your financial position in the future.
4. Benchmark results to industry standards.
To verify the credibility of your forecast, you can compare it against the results from within your industry. Examples of information that you should look into are financial ratios such as gross margin, return on equity, return on assets, and total headcount per customers.
5. Review your forecast regularly.
Finally, make sure to regularly measure your actual operating results against your forecast. Doing so will keep your forecast up to date, allowing you to make more informed decisions.
If you want to learn more about the secrets of creating a detailedfinancial forecast, checkout the infographic below from Joseph F. Fragnoli, CPA, PC.
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