Business forecasting is very important for a business/company’s development and growth. It is a decision-making that makes it easier for executives’ plan, budget and even estimate future growth based on performance and market trends. By being able to predict future outcomes with the business, managers can take on strategic measures to realize set goals and increase profitability where possible. It also helps reduce liabilities and unforeseen losses in the future. It is through a business forecast that managers can estimate two of the most essentials in financial outcomes; projected expenses and income.
Basics And Factors Considered In A Business Forecast
Individual attributes and factors need/have to be considered in a business forecast. Some of the basics are discussed below.
1. Financial Forecasts: This can be best defined as the budget allocated for the next fiscal year of the business. This is mostly calculated based on the projected expenses and incomes to create a cash flow forecast. By taking on a financial forecast, managers and business operators can determine how much they need to spend to realize profits in each month. The best way to come up with the financial forecast is by looking previous records of balance sheets, profit and loss statements, and most importantly, the cash flow forecast.
One of the toughest tasks in business forecasting is predicting the financial future without any business or trading records. Although the initial forecasts may be inaccurate and inexact, the frequent prediction will make it much easier to adjust thus making it easier to make more accurate forecasts.
2. Sales Forecasts: A sale’s forecast is an estimate of the projected sales within a specified period. It is through the sales forecast that a business can establish how much it projects to make from these sales. Sales forecasting depends on the level of activity the business/company has been experiencing in the recent past, and how many sales it has recorded so far. Both cash flow and profitability forecasts depend on sales forecasts to be accurate. Some of the factors that help entrepreneurs and accountants make an accurate forecast include marketing strategies in place, market intelligence signals, internal accounting and sales data records among others.
3. Cash Flow Forecasts: Every business needs proper cash flow to record higher profits and prevent losses. A cash flow forecast is, therefore, an estimation of the budget or amount of money the business needs to inject into its operations, and how much it will gain from the same. Cash flow forecasts often cover up to 12 months, though the period may be shorter depending on the main agenda. It is through a cash flow forecast that managers can predict cash shortage or surpluses in the budget, tax preparation and even know when it is the right time to secure a business loan. You can also use this forecast to determine whether your business is generating or meeting set expectations and goals.
Although business forecasts may be theoretical variables on projections, all forecasts shadow one process and almost always predict the future. This is the reason you too should consider taking on business forecasts to help determine the future of your business. If your company has been recording huge sales in the recent past, then a financial or cash flow forecast will help you determine some of the best practices to take on to maximize profitability and vice versa.
While the forecasts can help you maximize your business’ full potential, it can also be a cause for the breakdown of the same. Business forecasting can be misleading at times leading to self-limitations based on the figures. Nonetheless, used correctly, forecasting can help you plan ahead and be able to handle some elements that can’t be predicted.