3 Steps to Financial Forecasting for Your Business
Financial forecasting is the method of predicting where your business will be in the future in economic terms. With the use of pro forma statements, the predictions you develop during financial forecasting can be made concrete. Pro forma statements are financial statements that you prepare in advance to predict your financial status in the coming months and years.
No matter what your business goals are, it would help if you master financial forecasting. Whether your goal is for your business to dominate the world or for it to simply be a stable source of side income, financial forecasting will help you assess your financial situation and plan the steps that you need to take to achieve your goals. Financial forecasting also lets you prove that your business is on the right track toward growth, which is essential if you’re planning to bring investors on board.
In this article, we’ll take a look at the necessary steps of financial forecasting to help you get started. Shall we begin?
Step One: Gather your past financial records.
It’s essential to look at your business’ financial history. You need to look at the past to see how it’s grown. Your previous financial statements will help you assess the trends that helped your business develop over time. Then, you have to project those trends and developments into future growth predictions. If you’re using bookkeeping software, try using it to help you generate financial statements. Otherwise, your bookkeeper should have copies of your previous reports.
Step Two: Choose your forecast strategy.
There are two basic types of financial forecast: historical and research based. While all financial forecasts are always a mix of historical and research-based forecasts, yours will eventually lean more heavily toward one. The blend you’ll choose will depend on the resources you can acquire. If you have sufficient previous financial statements and can derive enough forecasts from them, then you can do a historical financial forecast.
Meanwhile, if you think your previous financial statements aren’t enough to generate a useful financial forecast, you can support it with research instead. Try looking at businesses like yours as well as other industry facts and variables related to and specific to your business. With the data you gather, you can generate a realistic financial forecast.
Step Three: Create pro forma statements.
Pro forma statements will lay down your financial plan in the immediate future. First, set a goal for the period for which you’re creating the financial forecast. A production schedule should back the target, and facts should support the statements in the forecast. Even though it’s a forecast, it should still be completed using educated guesses.
For instance, if you set a goal to make $50,000 worth of sales this year, where will it come from? Does your previous financial and sales history support that you can reach that goal? You should also take into consideration the strengths and weaknesses of your business and how they will affect your financial forecast. The cost of products, materials, labor, marketing, branding, transport, and all the other aspects of your business should be considered too.
Your financial forecast should also indicate other aspects, not just sales growth and goals. Perhaps you plan to grow your business by establishing another branch — but have you ever considered taking your business online too?
By creating a realistic financial forecast, you are not only predicting the growth and profit your business will realize but also creating a guide that will help you direct your path toward those very goals.
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