The Financial Forecasting Process: How it Works
Financial Forecasting can help any business, no matter where you are on your journey. But how does the process work?
- First off, we look at where our clients are at by looking at their financial statements.
- Then, we’ll work out what their goals are, whatever they might be
- From there, we’ll project revenue based on our market research, assumptions around demand, and anything else that might have an influence
- Then onto the exciting part, we’ll model their cashflow (what’s coming in and out) based on your different assumptions, like opening a new office or growing by 5%
- And we’ll create different scenarios (best, worst, in-between) which will allow you to plan for every eventuality, whether that means sticking to your guns or tweaking a few things.
How We Assist with Financial Forecasting
With the beauty of online accounting, all your data will be available in real-time. This means we’ll be able to test different scenarios, simulating best-case, worst-case and realistic outcomes based on your actual financial information. That way, you’ll be able to plan for every eventuality, give yourself targets and keep yourself accountable along the way. The best part? With real-time data, we’ll be able to tweak and change your forecasts as you go, as life very rarely goes as planned! Forecasts are a great way to plan for different scenarios, and although things change, they offer a solid benchmark to reference, which will inform how your business operates.
How Financial Forecasting Works
Wondering about opening a new office? Or maybe you’re looking to cut some costs? Whatever the situation, often the fear of the unknown can stop business owners from making big decisions. Forecasting acts as a blueprint, mapping out the effects of the changes you have in mind. Best of all, it’s based on your real financial information. That way, you can test different scenarios and work out the changes that need to be made (or not).
What is financial forecasting?
Financial forecasting is the process of predicting a business’s future financial performance by analysing historical data, current market trends and projected industry developments. The goal of financial forecasting is to help leaders make informed budget, hiring and growth decisions.
Why is financial forecasting important?
Wondering whether financial forecasting is for you? Well, we strongly believe that every business would benefit from it, no matter what their size or where they are on their journey.
Financial forecasting couldn’t be more useful to businesses. It provides you with a clear roadmap of how changes in your business will affect your financial performance. This allows you to set targets along the way and provides you with the opportunity to plan for every eventuality before it happens. For tax planning, it’s a dream, as it allows you to see your tax liabilities before they need paying, meaning you can set the money aside ahead of time. Forecasts are also a sure-fire way to show external parties that you know you have a solid plan. If it’s funding you’re looking for, financial forecasts are often a necessity for securing investor confidence, as they show you have a viable business worth investing in.
How do you do financial forecasting?
First off, we define the purpose and timeframe of the forecast, gathering all the financial records and industry insights and market research we need. Then we’ll project revenue based on past sales and market research, estimate expenses (COGS, operating costs, taxes, capital expenditures), and create financial statements (income statements, cash flow and balance sheets). From there, we’ll model different scenarios and refine the forecasts using real data where needed. With our expertise and Xero’s firepower, your financial forecasts will be a go-to for strategic decision-making.
Financial Forecasting vs Financial Planning
The two are linked but are subtly different.
Financial forecasting predicts your business’s future performance using data, trends and assumptions, focusing on projections including revenue, expenses and cashflow. Financial planning, however, is the method you use to hit your financial goals. It includes aspects like budgeting, investment strategies, tax planning and cashflow management. Forecasting is forward-looking and can be tweaked as you go, financial planning is often the actions that follow forecasting to help you hit your financial goals. Together, they make a dynamic duo perfect for helping business owners get a good grip on their numbers.
How does financial forecasting work?
Financial forecasting works by analysing past financial performance and current trends to understand how a business is likely to perform over a set period; through regular forecasting, businesses can estimate growth and identify areas of opportunity to help improve performance.
What is the process of financial forecasting?
The process of financial forecasting can vary depending on the business and its unique needs, but a typical process will involve establishing an objective, gathering historical data, projecting future income, creating a projected balance sheet and using results to make positive changes.
How to create a financial forecasting report?
Internal or external accountants create financial forecasting reports by reviewing past financial data and current trends to make informed assumptions about business growth; a good report will detail sales and balance sheet forecasts and income and cash flow statement projections.
What is the difference between a budget and a forecast?
The difference between budgeting and forecasting is intent; to budget is to set revenue goals for the future while to forecast is to predict future revenue based on current information. These processes work together to help leaders create practical goals built from realistic expectations.
Financial Forecasting Handled by Experts
Meet Neil Nichols, our Founder, who, through his own experience growing and selling a property business was inspired to make accounting more useful to SMEs.
During a previous role at Bain Capital, Neil became adept at helping businesses grow through a combination of financial forecasting and planning for the future. On this topic, Neil said:
“Far too many businesses neglect the importance of proper financial forecasting. Accounting firms rarely offer it as a service and many business owners either don’t know much about it or see it as something reserved for large companies. But with the amount of real-time data available, financial forecasting should be a necessity for every SME.”
Neil and the team help our clients every week with financial forecasting, allowing them to plan for the future and set targets along the way.
Find out more about our accounting services in London.
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