Business leaders who practice financial forecasting are better positioned to grow and overcome challenges and possible setbacks. Although it’s impossible to predict the future, seeing the trends evolve can give you substantial insight into what to anticipate. This way, you can have the opportunity to make well-informed decisions and adapt to keep your business afloat and grow it.
What to Know about Financial Forecasting
Essentially, financial forecasting is projecting possible outcomes in the future based on analysing past and current data. It is an effective planning tool to help companies adapt and overcome uncertain times by examining the predicted changes in demand for goods and services and drafting a strategic plan based on their findings.
However, it is important to note that the figures presented in the forecast will never be exact. They are only estimates of possible business income and expenses, either in short or long-term outlooks spanning one to two years. In addition, a well-grounded financial forecast incorporates macroeconomic factors and conditions that directly affect the company. The more data you collect from different sources, the stronger and more reliable your forecasts become.
Components to Consider when doing Forecasting
When creating forecasts, you cannot aim for exact data because predictions founded on past and current factors and conditions are always subject to change. But businesses that incorporate as many variables as possible based on well-gathered information have a better position to develop more accurate forecasts.
So, if you’re in the process of developing your financial forecast, be sure to consider the following factors:
- Prior results with time and conditions considered: Look at your business performance in previous years and take note of highs and lows. Find out the reason behind the changes in your performance by considering the time and social, economic, and cultural conditions.
- Internal risks: Many things can happen within the company that can easily be overlooked but also have an impact on your financial position. This may include clashes among shareholders, mismanagement, or lack of efficient equipment or manpower. To combat these risks, you need to integrate crisis management plans to enhance your forecasts.
- Macroeconomic risk: Aside from internal business ventures, you also need to consider the outside forces that may affect your growth and overall performance. This includes any sudden or significant global event. For example, natural disasters, political issues, and the pandemic are factors to account for when creating a forecast.
- Best and worst revenue possibility: Simply put, if everything goes according to plan, what revenue are you expecting to get? Alternately, if something goes wrong along the way, what outcome should you expect? This will paint a clearer picture of two extremes and the possible allowance that you have. To acquire this data, Singapore accounting experts recommend you utilise scenario planning methods.
- Anticipated expenses: Based on past data and balance sheets, you know what expenses your company makes regularly. However, prices change over time and therefore require recalculation to get accurate estimates. Moreover, after considering those mentioned above, you might also encounter unexpected spending, which you need to make allowances for in your forecast. This way, you can have more breathing room to move your expenses around when necessary.
How to Know if you can Trust your Revenue Forecast
Because financial forecasting is an essential part of making good decisions for your business, you need to ensure that your forecast is reliable and trustworthy. To gauge the accuracy of your forecast, take note of these three signs:
You have substantial data
For companies that have a long history of operating in the industry, they have substantial data to determine financial forecasts. However, for start-ups, getting data may be more challenging.
If you have no prior performance to base your forecasts on, you can look into your competitors and do market research to create a more informed forecast. Industry benchmarking is a good place to start to see how you are performing compared to the industry average.
You have realistic numbers
A common mistake that most business owners make is that they look at data that agrees with their beliefs and expectations. In short, they only consider information that benefits their purposes. Thus, while it does add to their data pool, it is incomplete.
To create a sound financial forecast with realistic numbers, you must collect all available data without bias. You can also hire accounting and bookkeeping services Singapore to have your numbers checked and reviewed.
You have a reliable system in place
Having a reliable system that accounts for all elements can help you calculate your finances more efficiently and accurately. If you have no system implemented yet, you can hire outsourced accounting services to assist you in this endeavour.
The Importance of Financial Forecasting
In conclusion, financial forecasting helps you make better business decisions without compromising your financial status. Moreover, it sets realistic expectations and gives you a better idea of what the future of your company will look like.
In truth, having a successful business doesn’t happen by chance. It requires rigorous financial data analysis, updated market and consumer insights, and in-depth knowledge of the business landscape. With the help of accounting firms in Singapore, you can adequately understand financial forecasting to succeed.