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How to Create Accurate Financial Forecasting for Your Company

Around 20% of small businesses in the United States fail within the first 12 months. This can stem from a variety of factors, such as poor employee performance or inadequate revenue.

It can also occur due to poor financial management. Proper financial forecasting is crucial for any successful business, but not everyone understands the best way to handle it.

We’ve put together a handful of tips that can help optimize your business strategy. Let’s explore the key information you should keep in mind when moving forward.

Define the Purpose of the Forecast

Before proceeding, it’s essential to determine the purpose of your forecast. Do you need to focus on how much money you’ll spend over a given period or on how your expenses will vary once certain circumstances occur?

The possibilities are virtually limitless, but do your best to pinpoint the key areas you must focus on. This goes a long way toward preventing issues you may have otherwise encountered.

Gather Historical Data

The more information you can reference when creating your forecast, the more accurate your results will be. Financial statements are key for predicting your future performance.

Companies that have been in business for at least a few years will have an advantage since they’ll have more data to pull from. If your company doesn’t have much historical data, you can use your performance over the past few months to make a financial forecast.

Choose a Time Frame

Your forecast will be effective only if you set parameters for your results. You can’t forecast your performance indefinitely.

Instead, you should choose the most relevant period. Quarterly forecasts are some of the most common, especially for businesses that have stringent tax obligations.

Select a Financial Forecast Method

There are various methods you can use for your financial forecast, and it’s essential to choose the right one. The ideal choice will depend on your needs. Let’s explore the most notable below.

Percent of Sales

As the name implies, this method involves assessing your total sales for your financial forecast. Your cost of goods sold is often proportional to your sales, so you should use the same growth estimate for both. To use a percent of sales forecast, look at the percentage of each account’s profits related to their total sales numbers.

For instance, one account might have profited $50,000 from 300 sales. You then divide each account by its sales. If you notice past trends have been consistent, you should assume they’ll remain true in the future.

To clarify, let’s assume your cost of goods sold has been 20% of sales for the past five years. There’s a good chance this trend will continue.

Simple Linear Regression

This type of forecast considers two variables: dependent and independent. The forecast’s dependent variable is the forecasted amount, and the independent variable is the fact that affects the independent variable. This can be broken down into the following formula:

  • Y = BX + A
  • Y: The forecasted number (dependent variable)
  • B: The regression line’s slope
  • X: The independent variable
  • A: The Y-intercept

This information will help you accurately predict future financial performance.

Moving Average

You’ll use the average or weighted average of previous timelines to forecast your future performance. It’s straightforward in practice, as you look at the average sales numbers from a previous period and use them to predict your upcoming performance. If you use the average of multiple periods, you can add them together and divide them by the total number of periods.

Market Research

This method is far more qualitative than the above, but it’s not any less effective. It offers a glimpse at the factors that might influence your financial performance.

A common example is the introduction of new technology to the industry. This could lead to drastic changes in typical results, which could be positive or negative.

Document and Monitor Results

The better you document your results, the more you’ll understand your performance. You can also use this documentation to aid with your future financial forecasts.

Get in the habit of documenting all of your financial details so you aren’t left looking for data when you need it. Situations like these can be highly frustrating and make it difficult to achieve the results you desire.

Work With a Professional

Working with a professional is one of the best ways to create an airtight corporate financial strategy. They have the resources and tools required to help you get the right results.

When looking for someone to hire, ensure that you research their past reputation. This is the best way to narrow down your potential options.

You should also see what other people say about their timeliness and professionalism. Pay close attention to how they handle criticism. Firms that don’t do well when facing negative feedback are ones you should avoid.

If you end up having a problem with them, they’ll likely get defensive or aggressive. Check their pricing, as well. It’s never recommended to go with the cheapest option you find, as these will fall short of your goals.

However, you don’t have to spend as much money as possible. There’s a point of diminishing returns regarding how much you budget for. Somewhere in the middle of the industry’s price range can likely help you meet your needs without forcing you to overspend.

Are they enthusiastic about working with you? If they aren’t interested in your project, they’ll overlook fine details that could impact your results.

Outsourcing to virtual CFO services is often the best choice due to their flexibility. With enough due diligence during your search, you shouldn’t have an issue finding the right choice for your situation.

Never Overlook Financial Forecasting

Without the right financial forecasting strategy, you risk spending far more money than anticipated. You could also experience less revenue than you projected. The good news is the tips in this guide will help you make the right decisions for your business.

Looking for other finance articles that can help you run a better company? Our blog has plenty like this one, so be sure to check them out today!

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