Last editedJun 20212 min read
A financial forecast definition
In simple terms, a financial forecast is an estimate of the future performance of a business. When you’re running a business, making plans and investing, it helps to have a clear idea of what you think that business will be doing in the months or even years to come. A financial forecast attempts to gauge the future financial performance of the business.
The aspects that help to make up a financial forecast
At the heart of any financial forecast is the bottom line of the business, made up of the revenue it can generate. More than anything else, this is dictated by financial figures such as sales, and so any useful financial forecast will be based around a careful estimate of what the future sales figures are likely to be. The financial forecast template also needs to take on board aspects of a business such as any other revenue streams, the fixed costs you know can be included and any likely variable future costs, and the capital the company holds.
The importance of financial forecasting
Using past performance as a guide, financial forecasting attempts to pin down future business trends. Having a firm idea of what the future is likely to bring is useful for planning spending over a certain period, or deciding where and how to concentrate the resources of a business.
From the viewpoint of outside investors, a financial forecast will be a means by which to estimate how shares in a company are likely to behave, and for entrepreneurs and CEOs themselves it will give them another data set – to go with past and present performance – to use when making a range of business decisions.
Types of financial forecast
In broad terms, there are two types of financial forecast. These are quantitative forecasts and speculative forecasts. Quantitative forecasts make use of past data to identify trends that can be extrapolated forward. If less historical data is available – when a business is relatively new, for example – then the business owner may have to rely more on speculative forecasting. Usually a detailed and useful forecast is created by combining the two methods.
Quantitative forecast methods
The simplest quantitative financial forecast involves examining the sales figures and expected costs of previous years and using these to make predictions about future years. A time series analysis is variation on this technique which lifts the data from a specific period and concentrates on spotting trends within that data. By including external factors such as overall consumer confidence during the period and metrics such as unemployment levels and interest rates, this method of financial forecast should be able to create a set of predicted results based on how those variables will have a future impact.
Speculative forecast methods
Speculative forecasts depend much more on business experience and a general “sense” of how a business will develop, rather than raw data and number crunching. A speculative forecast might be created using the opinions of key personnel in a company from departments such as sales, production and procurement. This information can be bolstered by consumer research using methods such as questionnaires, surveys and sample tests. Using the information gathered from experts and consumers the forecaster can then set out their predictions for future performance based on a range of different scenarios. Unless this business is a startup, the speculative forecasts will be combined with quantitative forecasts to create the fullest possible picture.
We can help
A key part of any financial forecasting is being able to rely on the payments you have coming in from customers now and in the future. Partnering with GoCardless keeps things as simple as possible and this includes the more complex aspects such as dealing with ad hoc payments or recurring payments.