What is it that allows a company to have a strong stand in the market? The obvious answer may be providing quality products and services. Whether big or small, a business also needs to plan for how it will be using its financial resources in the long-term. Financial forecasting allows small businesses to create a strong foothold in the market by effectively taking care of all its financial needs. For big companies, it provides stability and allows them to widen their reach.
Businesses are unpredictable, no doubt. You can never accurately predict how the market may turn out in the future, and forecasting your company’s financial needs will give you the advantage of handling unfavorable business situations. Big companies may have plenty of cash resources, but they may end up wasting them if they do not use them wisely. On the other hand, small firms have to work with limited capital, which makes it even more essential for them to plan how they will be using their money.
What is financial forecasting?
Financial forecasting is about having a financial plan in place. You might be following a monthly budget to ensure that you do not overspend. In the same way, a financial forecast allows you to prepare a budget for your business. A financial forecast works as an estimate for business growth by considering its expected income and expenditures.
Predicting how the finances will be used in the future can get a little tricky, especially for small businesses, as they do not have any trading history. In fact, even as you start predicting your financial requirements, you might end up making inaccurate adjustments. By forecasting regularly, you will be able to come up with accurate financial predictions.
Imagine how lost you would be if you were sailing across the ocean trying to reach a new place without a map? More or less, that is how directionless your business operations can get without planning how you will be utilizing your finances. Forecasting your business’s financial needs can help you achieve your business goals better and allow you to expand your business. It is more of a tool that will enable businesses to analyze where their resources are being used and where they need to be diverted. With accurate financial forecasting, you will gain a tighter grip on your business cash flow. It gives better control over where the money is being spent.
Why do businesses need to forecast their financial needs?
Your business plan is heavily dependent on its financial forecast. If things look gloomy, you will have the chance to improve the areas that need attention. In case it predicts that the business will be thriving, you can at least sit back and appreciate your employees for all the hard work. Also, as an investor in your business, your confidence in the business’s longevity will extend. With a financial plan in place, you will not just be able to achieve the profit you desire, but also know when exactly your business will reach the mark.
However, just forecasting the financial needs of your business is not enough. You will also need to review it regularly and make changes whenever required. Financial forecasts are usually made for one year. So once you complete the period, you need to look back at the predictions and see if the company has managed to achieve them or not. In case you notice that the company did not meet the expectations, study the differences, and take reconstructive steps to solve the issues. If they are too grave to be solved right away, you can always include them in your next budget plan and try to achieve them.
How efficient financial forecasting can help?
Setting up a business may be relatively easy, but surviving the ups and downs of a business is fairly difficult. Most firms that do not have a financial budget or plan in place tend to give in to the various challenges they face. Compare two businesses, one that follows a budget plan and one that doesn’t. You will understand that financial forecasting is just what stands between a bankrupt firm and a flourishing business.
Here is a quick list that explains the number of ways in which forecasting financial needs can help businesses:
- It helps ascertain the business’s financial viability, which is crucial, especially for small businesses.
- It allows businesses to create a business development model taking into account all its income and expenses for a certain period of time, usually one year. The model can help businesses predict how it may perform financially and if it needs to modify its strategies or operations.
- It allows businesses to have complete control over their finances and move towards achieving their financial goal.
- Serves as a reference for measuring future performance. It can also help determine if the business has enough cash or if it needs to borrow from other sources.
- It can serve as a helpful tool in getting a bank loan approved. A robust financial plan will make investors and lenders put their trust in the loan repaying ability of your business.
- It also helps in identifying potential financial risks.
You need to study the market thoroughly to forecast the financial needs of your business efficiently. You will then be able to combine the financial forecasts with your essential financial statements like profit and loss account and balance sheet. If you have just started your business, try forecasting its financial needs every few weeks or at least once a month. Big businesses can take the liberty of coming up with the forecasts on a quarterly basis. In any case, it is essential to revisit your budget plan regularly, make the required changes, and follow them.