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The process of estimating or predicting the future financial performance of the business is known as Financial Forecasting. This gives an idea of how the business will look financially in the future. In Financial Forecasting, the complete financial model is predicted ie., all the three financial statements (Income statement, cash flow statement and balance sheet). However, mostly income statements are forecasted sometimes and the company’s financial revenue, gross margin and expenses are predicted at last.

But one should be very careful while doing forecasting and here is the list of some Do’s and Don’ts to make the work easier and avoid mistakes.

 

Do’s

1. Budget should be prepared regularly and it should be constantly reassessed: Neither the market nor the status of the company is same at different time intervals, so why should your budget be static for the whole year. One should regularly evaluate the forecast and changes should be made to reflect any new information. This would give the managers an idea about what is coming down the road ahead for the company.

2. It takes time to learn and reflect: It always takes time to come to accurate forecasts. Managers take a look at how actual performance is as compared to the forecast and the reasons behind it. Then they will further improve their forecasting and ultimately, the business decisions will also improve.

3. Be aware of what you need for your business: Business should know their assets that are most crucial. This helps to pay more attention to the key components that will help to protect the financial security now and as well as in the future. This will help to control the cash flow.

4. Always keep emergency fund: Unexpected expenses are inevitable in the business. So, emergency funds help to keep your financial plan on track and mitigate the damage at the time of crisis.

5. Consider multiple scenarios: While doing financial forecasting, business should always consider at least two scenarios (one is optimistic and another is cautious) because there are many uncertain major factors such as government regulations, new competition, or overall economic growth that could impact the business.

6. Easy to start with expenses: It’s easier to predict the expenses than the revenues of the business. Forecast model can be made more accurate by starting with the fixed expenses like rent, utilities and insurance because you will be sure that these costs will occur in the coming quarter/ year.

7. It’s better to have comparison: If you are not in niche business, then it is beneficial to compare the projections to the results of comparable companies. For a niche business, it might be hard to find data on comparable businesses, so you can compare your projections to your own operating history.

8. Have a baseline: There should always be a reference or a baseline from which you can relate. This could be either based on historical performance, what other players do in the industry, or may be the industry standards like gross margins, burden rates, and ratios for major expense categories to revenue. This will help to stay close to reality. 

 

 Don’ts

 

1. Leveraging for Cost Cutting:

The main objective is to create an annual budget. So, if you start making budget by cutting costs then it will always create a neck-to-neck environment for everyone. When you reduce expenses, you show higher net income. But a forecasting approach that depends on cost-cutting efforts creates adversarial relationships and a combative environment. Business partners have to cut down on the expenses that are necessary from day one.

 

2. Limiting Your Focus to Incremental Change:

You should not be narrow minded while doing financial forecasting. It’s better to look at the bigger picture and think differently to better influence the outcomes for tomorrow. When you look specifically at spending or revenue opportunities, you miss opportunities for more impactful improvement.

 

3. Leveraging a Single Dimension:

One thing that worked in past times may or may not work in future. Every business has a core product or service and most of the revenue comes from that. So, your model should not revolve around creating the best possible outcomes for that primary driver. There are multiple dimensions that drive revenue and costs.

 

4. Forget to modify the worksheet:

The model should be modified regularly to suit and depict the current state of the business.   

 

5.Don’t forget to consider hidden costs associated with the growth:

Think on all the aspects. If there’s a new revenue stream, then all the new types of costs associated with it should be considered and anything that might be unique for their business should also be given a thought. Think about the resources and partners they rely on to run their business. This helps to develop a good strategic plan, at times adding revenue or saving expense if leveraged correctly. Be sure that everything is thought through.

 

Financial forecasting – do’s and don’ts

 

The process of estimating or predicting the future financial performance of the business is known as Financial Forecasting. This provides an idea of how the business will look financially in the future. In Financial Forecasting, the entire financial model is predicted ie., all the three financial statements (Income statement, income statement and balance sheet). 

 

However, mostly income statements are forecasted sometimes  and therefore the  company’s financial revenue, margin of profit  and expenses are predicted at last.

But one should be very careful while doing forecasting and here is the list of some Do’s and Don’ts to make the work easier and avoid mistakes.

 

Do’s

 

Budget should be prepared regularly and it should be constantly reassessed: Neither the market nor the status of  the corporate is same at different time intervals, so why should your budget be static for the full  year. One should regularly evaluate the forecast and changes should be made to reflect any new information. This is able to give the managers an idea about what is coming down the road ahead for the company. 

 

It takes time to find out and reflect: It always takes time to come to accurate forecasts. Managers take  a glance  at how actual performance is as compared to the forecast and the reasons behind it. Then they’re going to further improve their forecasting and ultimately, the business decisions also will improve.

 

Be aware of what you need for your business: Business should know their assets that are most crucial. This helps to pay more attention to the key components which will help to protect the financial security now and as well as in the future. This may help to control the cash flow. 

 

Always keep emergency fund: Unexpected expenses are inevitable within the business. So, emergency funds help to stay your financial plan on track and mitigate the damage at the time of crisis.

 

Consider multiple scenarios: While doing financial forecasting, business  should  consider at least two scenarios (one is optimistic and another is cautious) because there are many uncertain major factors such as government regulations, new competition, or overall  economic process  that could impact the business.

 

Easy  to start out  with expenses: It’s easier to predict the expenses than the revenues of the business. Forecast model  are often made more accurate by starting with the fixed expenses like rent, utilities and insurance because  you’ll  be sure that these costs will occur in the coming quarter/ year. 

 

It’s better to possess  comparison: If you are not in niche business, then  it’s  beneficial to compare the projections to the results of comparable companies. For a distinct segment  business, it’d  be hard to find data on comparable businesses, so you’ll  compare your projections to your own operating history.

 

Have a baseline: There  should  be a reference or a baseline from which you can relate. This might  be either based on historical performance, what other players  neutralize  the industry, or  could also be  the industry standards like gross margins, burden rates, and ratios for major expense categories to revenue.  this may  help to stay close to reality. 

 

Don’ts

 

1. Leveraging for Cost Cutting:  the most  objective is to create an annual budget. So, if you begin making budget by cutting costs then it will always create a neck-to-neck environment for everyone. Once you  reduce expenses, you show higher net. But a forecasting approach that depends on cost-cutting efforts creates adversarial relationships and a combative environment. Business partners  need to cut down on the expenses that are necessary from day one.

 

2. Limiting Your Focus to Incremental Change:  you ought to not be narrow minded while doing financial forecasting. It’s better to seem at the bigger picture and think differently to better influence the outcomes for tomorrow. Once you look specifically at spending or revenue opportunities, you miss opportunities for more impactful improvement.

 

3. Leveraging One Dimension: One thing that worked in past times may or may not work in future. Every business  features a core product or service and most of the revenue comes from that. So, your model shouldn’t revolve around creating the best possible outcomes for that primary driver. There are multiple dimensions that drive revenue and costs.

 

4. Forget to switch the worksheet: The model should be modified regularly to suit and depict the current state of the business. 

 

5. Don’t forget  to think about  hidden costs associated with the growth: Think on all the aspects. If there’s a replacement revenue stream, then all the new  sorts of costs associated with it should be considered and anything that might be unique for their business should also be given a thought. Give some thought to the resources and partners they rely on to run their business. This helps to develop an honest  strategic plan, sometimes adding revenue or saving expense if leveraged correctly. Make certain that everything is thought through.

 

The material / information contained above or other parts of this website is for general information purposes only and should not be relied upon for tax, legal or accounting advice. You should consult an expert in the relevant field before engaging in any transaction since applicability of the above may be different on the facts and circumstances of your situation. While we have made every attempt to ensure that the information contained on this website has been obtained from reliable sources, we are not responsible for any errors, omission or the results obtained by using the above information. We are not responsible for updating the above for changes in law, practices, or interpretation.

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