Are you trying to grow your business? How about understanding where your upcoming tax bill might fall? Although no one can predict the future, there are strategies you can use to illuminate your path to success, one of which is financial forecasting.
In this article, we’ll dive into the basics of financial forecasting, touching on the benefits and how you can prepare this financial report for your business with ease.
What is Financial Forecasting?
Financial forecasting is the process of projecting revenue and expenses for a future period. The time period and complexity of your forecasted financials can vary based on your intended use. For example, if you are looking to determine your tentative profit in five years with a 10% growth in sales, your financial forecast will be over a five-year period and involve more subjective data.
On the contrary, if you are looking to project sales through the end of the year, the forecasting process will be much simpler. Regardless of your intended use, financial forecasts are a great way to project future financial positions based on historical data and market expectations.
The Benefits of Financial Forecasting
Financial forecasting has numerous benefits outside of giving you a concrete projection of your future financial position. For one, financial forecasting can help reduce risk surrounding market uncertainty. If your financial forecast shows a decline in revenue, maybe you start building a new product or offering a new service.
Another benefit of financial forecasting is stronger cash flow. When you know what your financial position will look like in the future, you can better plan for equipment purchases and growth. Could you afford to hire another employee in six months or reinvest in more efficient equipment? These decisions take time. Proper financial forecasting allows you to plan ahead to stay on track for success.
How to Prepare a Financial Forecast
Financial forecasts are relatively straightforward to prepare. First, you will need historical data. This could be your income statement for the prior month or the prior year. Then, you will need to apply a formula to each line item. If you are projecting financials through the end of the year, take each line item and divide it by the number of months that have already passed.
For example, if you pull reports from January through May, you will divide these numbers by 5. Then, multiply each line item by 12 to forecast accounts through the end of the year. The process is similar for forecasts that span multiple years. First, pull the income statement for the prior 12-month period. Then, adjust each line item for your expected growth rate. For example, adding 5% to revenue each year for expected price increases.
Financial forecasts rely on using accurate historical data, which is why it’s important that you leverage accounting software, like QuickBooks Online. QuickBooks Online allows you to pull financial statements for different time periods, including weekly, monthly, and annually. This is indispensable when it comes to crafting your financial forecast.
How can you use financial forecasts to solidify your business success? Could you start planning for an upcoming tax liability or determine how your business will grow over the next five years? Whatever your use for financial forecasts, our team is here to help. Reach out today to schedule your free consultation.