These days, it’s as important as ever for Finance Directors and Managers to effectively forecast financials. With an ever-changing landscape in the UK when it comes to spending, it’s vital to take the time to not just assess your current financial position, but implement practices that allow you to make predictions, so you can spot trends and make informed business decisions.
What is financial forecasting and why is it important?
Financial forecasting estimates a company’s future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data. It allows businesses to make decisions on their budgeting for upcoming periods, make decisions about when to push for investments and when to tighten their belts (for example, if they know July and August are their quieter months because of frequent leave), and also helps management teams to take immediate action based on the forecasted data.
How to improve your financial forecasting with 5 quick tips
Define the purpose of a financial forecast and establish where you’ll get your data
Defining your financial forecast’s purpose is essential to determining which metrics and factors to consider when doing it. It’s also really important that the data source you use can provide you with consistent, standardised data, such as data that you automate from reports in your financial accounting system.
Automate the forecasting process
Automation is becoming more and more prevalent (and important) for finance teams. It helps to eliminate errors, streamline processes and frees up valuable time for your finance teams. The same can be said for forecasting too. Some finance teams continue to use spreadsheets for this activity, but there are systems with automation capabilities that can drastically improve outcomes.
Gather past financial statements and historical data
One of the components of financial forecasting involves analysing past financial data. That means it is key to gather all the information that you can when it comes to historical data. Including:
- Revenue
- Losses
- Liabilities
- Investments
- Equity
- Expenditures
- Comprehensive income
- Earnings per share
- Fixed costs
Choose a financial forecast method
There are two financial forecasting methods:
- Quantitative forecasting uses historical information and data to identify trends, reliable patterns, and trends.
- Qualitative forecasting analyses experts’ opinions and sentiments about the company and market as a whole.
Each method is suitable for different uses and has its strengths and shortcomings. However, qualitative forecasting is more suitable for smaller or newer business which do not have past data to which they can use.
Maintain, review and update
Financial forecasts change over time as circumstances change, so it’s key that forecasts are maintained and reviewed regularly. It is important to document and monitor your forecast’s results over time, especially after major internal and external changes.
By making necessary updates, it is much easier for Finance Directors and Managers to spot trends, identify risks and make informed decisions.