How to Prepare Financial Forecasts – a friendly guide!
Financial forecasts are a crucial aspect of business planning and decision-making. Simply put, they’re predictions of future financial performance based on past and current trends.
Lots of businesses ask their accountants to prepare their forecasts for them, but at Mazuma we’re a firm believer that financial forecasts are best put together by the business owner. An accountant can help with the structure and formatting of them, and some advice around tricker things like accounting for VAT. But no-one knows your business like you do, so it’s worthwhile taking the time to understand how to create forecasts for yourself.
These forecasts help businesses make informed decisions, set realistic goals, and plan for future growth. But, if you’re not a finance expert, the concept of financial forecasting may seem a bit daunting. Don’t worry; we’re here to break it down for you in a friendly, easy-to-understand way.
Types of Financial Forecasts
There are different types of financial forecasts, but some of the most common include:
- Sales Forecast: A prediction of future sales based on historical data and trends, economic conditions, and market trends.
- Profit Forecast: A prediction of future profits based on estimated sales, costs, and expenses.
- Cash Flow Forecast: A prediction of future cash inflows and outflows to determine if a business has sufficient funds to meet its obligations.
- Balance Sheet Forecast: A prediction of a company’s assets, liabilities, and equity at a specific point in the future.
Why are Financial Forecasts Important?
Financial forecasts help businesses plan for the future by providing a clear picture of what’s to come. By forecasting future financial performance, businesses can make informed decisions, such as:
- Determining the budget and resources needed for new projects.
- Deciding when to invest in new equipment or hire additional staff.
- Planning for future growth and expansion.
- Identifying potential financial risks and taking steps to mitigate them.
Creating a Financial Forecast
Creating a financial forecast requires data, analysis, and a bit of creativity. Here are the basic steps involved:
- Gather historical data: This includes sales figures, expenses, and other financial data.
- Analyze trends: Look for patterns in the historical data and identify trends that will likely continue in the future.
- Determine key drivers: Identify the factors that will drive future financial performance, such as economic conditions, market trends, and company initiatives.
- Make predictions: Based on the historical data, trends, and key drivers, make predictions for future sales, profits, cash flows, and other financial metrics.
- Review and refine: Regularly review and refine the financial forecast as new information becomes available and conditions change.
Financial forecasts are an important tool for businesses to plan for the future and make informed decisions. They provide a clear picture of future financial performance and help companies stay on track toward their goals. If you’re new to financial forecasting, don’t worry. With some data, analysis, and a bit of creativity, you’ll be forecasting like a pro in no time!
And if all of the above wasn’t enough information for you, our Co-founder, Lucy Cohen, has made the video below for you to talk you through some of the principles of how to prepare financial forecasts.