The Importance of Financial Forecasting
April 4, 2015 Leave a comment
Financial forecasting is vital to understanding how a business can grow as well as how to face economic downturns and still come out on top. A forecast allows a company to evaluate current and future fiscal conditions in order to guide decisions about policy and manufacturing, not to mention setting up an accurate annual budget. Everyone from small businesses to huge corporations should ideally have in mind what the future of their company looks like so they can plan accordingly.
Of course, accurate predictions can be difficult to come by, especially because of all the factors involved. That’s why experts such as Drew Pearson of General Atlantic have streamlined the process of reviewing portfolios, assessing performance, and monitoring risk management.
The trick is to look at future demand. To do that, it’s important to collect relevant data—not necessarily with complex analytical software, but by having a thorough understanding of current business practices and trends and making an educated guess at what the future might hold. Kien Leong of Production Scheduling suggests paying close attention to current customer trends and, based on that data, trying to project those trends into the future and adapting as trends change. Most importantly, businesses should take the time to measure forecast accuracy.
Another key factor is allowing for a range of values and scenarios in the forecast. Obviously the future is uncertain, so a definitive forecast isn’t particularly accurate, nor does it allow for changes and maneuvering if the markets change quickly, as they tend to do.
Some key questions to ask when putting together a financial forecast for a company include:
- What is the time span of the forecast?
- What is the forecast objective? In other words, will it affect what investments the company makes? Should the forecast lean toward conservative or more aggressive estimates?
- What are the major revenue and expenditure categories?
- What political/legal issues might affect the forecast? Will any new laws come into play?
The ins and outs of financial forecasting can be complicated, but ultimately they depend less on absolute accuracy and more on being aware of the current market and allowing for a variety of future possibilities.