The importance of financial forecasting

Budgeting, business planning, headcount management and strategic decision-making are all influenced by financial forecasts. In short, forecasting is the basis of every financial decision your people make. Forecasting can mitigate the effects of unexpected events and foster opportunities for expansion during favorable periods.However, for finance teams, creating more regular forecasts is challenging due to processes traditionally designed for quarterly, or at best, monthly tasks and the need to combine historical performance, actual performance and future market predictions.

Now with the arrival of modern tools like financial planning and analytics platforms, effective forecasting can begin as soon as the budget is implemented. This is possible because finance teams now have direct access to consolidated financial data, including actuals, allowing them to easily roll it forward for continuous monthly forecasting

What is financial forecasting?

Financial forecasting is the process of using financial and operational data, historical data, and market trends to predict future financial performance. This skill enables finance and FP&A teams to anticipate potential opportunities and challenges, equipping them with the insights needed for effective decision-making. By leveraging forecasting, business owners and stakeholders can allocate resources wisely, optimize operations, and align efforts with strategic planning objectives.

The importance of financial forecasting lies in its ability to enhance decision-making, manage risks, and build confidence among stakeholders.

Types of financial forecasting

There are several types of financial forecasting, each tailored to specific objectives and time frames:

Cash Flow Forecasting: Essential for tracking the inflow and outflow of funds in cashflow statement, enabling business owners to avoid cash shortfalls and maintain liquidity.

Sales Forecasting: Focuses on predicting future revenue based on market trends, past performance, and seasonality.

Income Statement Forecasting: Projects revenues, expenses, and profits, providing a comprehensive view of a business's future financial outcomes.

Balance Sheet Forecasting: Estimates future financial positions, including assets, liabilities, and equity.

Rolling Forecasts: A dynamic approach that adjusts projections regularly, offering real-time insights into financial performance.

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Sales budgeting and forecasting

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Better forecasting = better financial outcomes

Robust financial forecasting practices often result in improved financial outcomes, better understanding of future revenue streams and enhanced cash flow stability.

Having a forecast in place enables business unit heads to strategize spending more effectively for their teams. Procurement and supply chain teams can effectively plan for capacity and business owners can keep the desired workforce in place. Sales professionals can benchmark metrics and set realistic sales targets through deep analysis of actual financial performance.

Forecasting acts as a crucial gauge for assessing the overall well-being of your business. As the fiscal year plays out, a platform with built-in forecasting measurement like Phocas Budgets and Forecast can assess the effectiveness of existing revenue-generating strategies across different business units, assess the market's impact (like inflation or interest rates) on your financials, and pinpoint areas of disconnection for your finance team and business units heads to adjust.

The terms forecasting and budgeting are frequently used interchangeably, yet they represent distinct processes with different objectives. Forecasting initiates the broader budgeting process by leveraging known data to model different scenarios.

A financial planning and analytics platform (FP&A) like Phocas allows your finance team and business unit heads to create connected budgets, enhance their decision-making, whether it be inventory purchases to when is the right time to recruit new people. Forecasting ensures that decisions are grounded in accurate historical data and detailed financial projections.

Financial forecasting methods

Depending on the software you use, many will have forecasting methods built-in and you can choose to use what suits based on your needs and available data.

Quantitative Forecasting

• Regression Analysis: Establishes relationships between variables to predict future trends.
• Moving Average: Smooths out fluctuations for short-term forecasts.
• Straight-Line Method: Projects future financial performance using historical growth rates.

Qualitative Forecasting

• Ideal for new business ventures lacking historical data.
• Relies on expert opinions, market research, and insights into customer behavior.

Integral to financial forecasting is the exploration of strategies to deal with unexpected circumstances. So when sudden changes do occur you can address them faster because the finance team can spot short term changes while also keeping an eye on the bigger business picture.

These changes have not gone unnoticed by finance teams. In a recent chartered accountant survey, finance professionals identified forecasting and cashflow forecasting as a tasks that are difficult to complete but something they want to do more regularly. This recognizes both the growing importance of financial forecasting and that current processes aren’t meeting business needs.

Improving collaboration

With a single source of truth, you can empower staff across all divisions and levels to share up-to-date information. Users can update information, add comments, and see changes in real-time. Teams can provide timely, valuable inputs for the forecasting process.

Enabling driver-based planning

Finance teams can improve forecasts by incorporating both internal and external data through driver-based planning. By capturing data from various sources, your can gain greater insights into what drivers contribute to performance and how. Decision-makers across the business can then use this information to focus on key needle-moving metrics.

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Mitigating financial risks

Financial forecasting helps businesses navigate uncertainties and prepare for worst-case scenarios by:

• Conducting sensitivity analyses to evaluate how changes in metrics like cost of goods or market demand impact financial outcomes.
• Using forecasting software to simulate different scenarios and improve accuracy.
• Monitoring key financial statements, including the income statement, cash flow statement, and balance sheet.

Financial forecasting is a strategic advantage for businesses of all sizes. By leveraging historical data, adopting suitable forecasting models, and embracing real-time adjustments, businesses can enhance financial performance and achieve long-term stability.

Whether you're a CFO refining your budgeting process or a sales manager determining how best to sell a new product, investing in technology to help with forecasting can help you deal with change and seize opportunities in a competitive landscape. Accurate financial forecasting isn't just about predicting numbers—it's about shaping the future of your business.

Phocas Budgets and Forecasts makes regular financial forecasting accessible. It’s simple to implement, easy to use, and can help boost business performance.