5 types of financial forecasting
Financial forecasting is key to running a successful business. By understanding the short and long-term commercial trends affecting your business, you can devise an effective risk mitigation strategy. What's more, you can predict if your organization is heading in the right direction.
Below, we summarize the financial forecasts that every forward-thinking company should adopt as part of their business planning.
What Makes A Good Financial Forecast?
Since financial forecasts are primarily used to predict future trends and outcomes, it's important that they are both accurate and easy to understand. When combined, there are a few forecasting methods which deliver all the financial information you require to grow your business sustainably.
1: Budget Forecasting
It's common for companies to only analyze their budget once a year for the annual budget plan. The good news is that budget forecasting lets you assess your income and expenditures on a regular basis. By reviewing your budget performance, you can anticipate potential changes to next year's budget planning based on current data.
The great thing about budget forecasting is that it allows you to put contingency plans in place in case, for example, there's a major problem with your expenditures. You can also check that your current budget is always sufficient for business needs.
2: Regular Forecasting
A financial forecast lets you look into the horizon and predict how your business will perform. It typically forecasts these things:
- Revenue
- Gross margins
- Overheads and expenses
This way, you get a bird's eye view of your entire business and how it's performing in both the short and long-term. You can make your forecast as detailed as you want, and it can cover whatever timescale you set (e.g. quarterly, annually).
3: Rolling Forecasts
Rolling forecasts always forecast a set number of months into the future. Here's an example. Say you want to forecast 12 months into the future. You begin in January and forecast through to January of the following year. Once January ends and February begins, the forecast end date automatically moves to February of the following year, and so on.
Rolling forecasts can be easily adapted to suit changing business needs.
4: Continuous Forecasting
Unlike rolling forecasts, continuous forecasting has no time limit but it typically covers no more than a month at a time. An example is monitoring your company's social media feed. An upturn in engagement suggests potential growth. This enables you to prepare your stock levels in advance.
Naturally, continuous forecasting suits companies which rely heavily on consumer behavior and social media. The process is difficult, though. It requires automatic data extraction, streamlined processing, and integrated platforms.
5: Scenario Planning
Scenario planning lets you consider various possible outcomes for your business based on the evidence available. For example, you can use this strategy to prepare your company for whatever changes may be heading your way. This could be anything from a market downturn or a new competitor emerging.
In large organizations, scenario planning typically involves compiling budgets and forecasts and carefully comparing every conceivable scenario against actual events.
Conclusion
Utilizing a variety of financial forecasting models can help you in both a long and short-term capacity. You can discover everything you need to know about your company's performance, your risk factors, and ultimately, your company's future.
Do you want to know more on how to obtain the ultimate forecasting situation? Get in contact for free advise on how to get your organisation ready and your systems in order.
