How To Construct A Financial Forecast

One of the more important aspects of management is financial forecasting. Forecasts are an important part of business as knowing your financial position over coming months or years will help shape your business decisions and strategy. Getting it right can help enormously – getting it wrong can result in costly mistakes (e.g. extra inventory or staff).

Forecasts by their nature, are not an exact science, they are constructed using both facts and assumptions regarding the likely business performance during the period targeted. Because assumptions are made, financial forecasting can be quite difficult. Gathering the right information to make these decisions can be time consuming, however spending the right amount of time on your forecast is important – it’s only as good as the numbers you put into it. The basis for some of the planning may be completely sound, for example you know what your current order book is and when your likely to ship it, however beyond that it can be a little bit like guesswork – for example some of the questions you’ll need to ask are:

What cash demands does your company face in the coming year?
What levels of profit do you expect to make
How many staff do you think you’ll need.

Now you might not know the answers to these so what should you do? You may choose to base your forecast on your business history, or base your sharp increase in revenue on expected changes in the market (i.e. introduction of new technology). Whatever you choose to do it is important that your forecast includes the right footnotes or annotations so that your forecast is easily understood and that the numbers can be interpreted inline with your assumptions.

When constructing your forecast as a minimum you should include the following:

• Projected revenue/Sales forecast

• Anticipated costs

• Estimated Assets and Liabilities

• Expected Cash flow

Once completed, your forecast should be reviewed periodically – your forecast may shift depending on your financial objectives. Updating the forecast regularly will enable you to review past predictions and assess whether you were on target or off and help develop your forecasting skills.

Bizbodz.com provides articles, resources and tools to help your business. From General Management to Supply Chain bizbodz is there to help. Business Best Practice at your fingertips.