What Is Financial Forecasting?

Financial forecasting is an essential aspect of your business. It is a way of predicting how your company will perform. Forecasting goes hand-in-hand with a budget and is vital to the success of your business. Budgeting determines where the company wants to go, and forecasting tells if the company can go in that direction. Creating a financial forecast can also assist with obtaining financing for projects or purchases. Potential investors and lenders will want to know you have a stable future.

Financial forecasting starts with three critical reports:

Cash Flow Statement - This will depict how much money comes in and how much goes out. 

Income statement - Otherwise known as a Profit & Loss Statement, it will show how much money you make after subtracting expenses.

Balance sheet - Sometimes referred to as a Financial Statement, your Balance Sheet will illustrate your assets and liabilities.

Determining Expenses

The cash flow statement can be a significant tool for financial forecasting. Review the current expenses and determine if any of those will increase. There are always areas where you will see an increase, so bear that in mind. Also, you can count on some items becoming more expensive every year, such as fuel, auto, and liability insurance. If you have aging vehicles, consider repairs and replacement costs. This can be true for many electronic devices such as cell phones and computers. 

While some expenses may increase, others may stay the same or decrease. You have a fixed cost if you know your car payment will be the same for the next five years. However, you may have a payment on a credit card going down as you pay off a part of the balance. 

At this point, you can make a projection of your expenses for the next two to four years. You will want to construct a scenario for regular, best, and worst, thus creating a cushion to eliminate surprises. It is wise to note how you arrived at the numbers.

Sales

Now that you have a firm grasp of your forecasted expenses, you can make a wise sales assessment. If you have ideas to increase sales, include the expenses to go with the increase. This may be additional employees or office space. 

Final Steps

Now you have your forecasted expenses and sales. Additional items must be considered as this is a more complicated task. You may want to hire a professional to help you, especially if your business has particular circumstances such as inventory or cost of goods expenses. Regarding your business, consulting with someone more knowledgeable is a good idea.