Business and uncertainty always go hand-in-hand. While you cannot predict the future outcomes of your business, you can surely utilize the concept of financial forecasting to develop better strategies and realistic budgets for growth.
Financial forecasting for any organization involves analyzing the past so that you can predict its future. It is a model or plan that uses historical data, including revenues, expenses, profits, and losses, to project future income and expenses. Such forecasting factors in macroeconomic conditions as well as industry and business trends. Using this model, you can look ahead at the upcoming year and prepare a monthly financial forecast to record trends and create your budget.
Many business executives use financial forecasting to set goals and objectives, allocate resources, and predict expenses.
Importance of Financial Forecasting
Every organization needs vision and direction. If you forge ahead without defining your goals and objectives, managers will have no understanding of where the organization is going and no basis for adding or allocating resources. Goals and direction are also essential in terms of the resources and capital you may need to accelerate your business. That’s where financial forecasting comes into the picture.
Whether you work in a large company or small organization, financial forecasting helps you plan for the future, and define the annual operating budget. It also helps in improving long-term financial planning for your business. This planning tool aids management in scenario modeling to navigate future uncertainties.
Financial forecasting also allows your organization to understand the impact of operational decisions on financial results. This includes identifying key business drivers that impact revenue and expenses so that operational plans can be linked to financial plans and forecasts.
Some may think that financial forecasting benefits only large businesses and organizations. But do you know that this approach is equally beneficial for small businesses? As a small enterprise, financial forecasts can inform annual budgets that provide a roadmap for all of your activities and initiatives, such as geographic expansion or launching new products or services.
Using this tool, you can also model different scenarios based on varied assumptions such as base-case, best-case, and worst-case scenarios, and others. By mapping out different scenarios in advance, your organization can be better prepared for the future. In short, financial forecasting and scenario modeling help your business prepare for all the ups and downs of fluctuating market conditions.
The use of Financial Forecasting Software
So, how do you perform financial forecasting for your business or organization? Many organizations rely on spreadsheets, which are readily available, inexpensive, and easy to use. But as organizations grow and evolve they often outgrow the spreadsheet approach. The next step for most organizations is to invest in financial forecasting software that is designed to support the financial forecasting and planning needs of small, mid-sized, and large enterprises.
The main advantage of this software is having a central, scalable database and calculation engine that can handle the complexity of financial forecasting. Users enter their data directly through a web browser or spreadsheet front-end into the system instead of emailing spreadsheets that need to be manually consolidated. The system does the hard work of aggregating submissions from multiple users to create projections and insights with fewer errors.
While choosing the software, you can consider various factors such as loading speed, ease of use, range of functionality, flexibility to address specific industry or company requirements. You’ll want to consider both current and future requirements when selecting financial forecasting software to maximize ROI from your investment. It is a good idea to spend some time discussing and documenting your requirements and then identify software that can address all or most of them.
Businesses and organizations aren’t static, they are constantly evolving based on external and internal factors. To be both focused and agile in the face of change calls for designing your business strategies meticulously, including your revenue, expenses, and other budget considerations. Financial forecasting helps you create and manage your budgets and plans proactively. The budgeting and planning process in a dynamic organization can be complicated. But with the right financial forecasting software, your organization can create more realistic budgets and have the agility needed to make mid-course corrections to forecasts on a monthly or quarterly basis.
Having the right financial forecasting software in place will provide your organization with a better chance of setting and meeting strategic goals and objectives.