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What is financial forecasting?

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Last editedMar 20222 min read

Financial forecasting can be extremely beneficial to any business, although small business owners often struggle to find the time to conduct the process. Between driving sales and generating leads as well as maintaining stock and ordering supplies, there doesn’t seem to be enough time in the day to conduct a thorough financial forecast.

It is worth making time, however, as the objectives of financial forecasting are all about identifying new opportunities and staying ahead of the competition. The projections generated by the financial forecasting process can also act as a guide for strategic decision-making which benefits the company in the long term.

Here is our quick guide to what financial forecasting is and how you can use it to better position your business for success.

What is financial forecasting for?

Financial forecasting is a planning process that makes money management easier and the future less uncertain by identifying patterns and trends. A big part of financial forecasting is using past and present data to project potential future outcomes.

Another important aspect of forecasting is the projection of different scenarios depending on a variety of factors. On one hand you might project according to everything going perfectly, and on the other make a projection should everything go wrong. You would also make other projections according to certain scenarios such as unforeseen costs or unexpected loss of staff or productivity. There are many other numerous variables that could affect your company’s fortunes which can be factored into the forecasting process.

Forecasting might be used by management to make decisions such as how much inventory to purchase in order to fulfil orders without tying up too much cash in unsold stock. New businesses can also develop a financial budget or cash management plan with a financial forecast for start-ups. This can then help inform important decisions such as hiring extra staff or investing in new equipment or marketing campaigns.

Let’s look at the main benefits of financial forecasting.

Business benefits of financial forecasting

As described above, you can use financial forecasting for a variety of purposes, but all of the purposes have specific benefits. These benefits include:

managing and maintaining cash flow
planning a pathway towards goalspProviding investors with valuable data
identifying opportunities and risks

Manage and maintain cash flow

Maintaining a strong cash balance will give you flexibility to cover unexpected expenses as well as take opportunities as and when they arise. A forecast may also highlight potential gaps in your business budget, so you can plan ahead and identify the options available to fill those gaps.

Plan a pathway towards goals

Planning a pathway towards your business goals requires understanding of what you need to do in order to get there. This means understanding your present finances and the expenses you will incur along the way to your goal. A financial forecast will pave the way, showing you exactly what you need to do to get where you want to be.

Provide investors with valuable data

Any business with investors will likely already be using some variation of financial forecasting in order to keep the investors informed as to the health of the company. A financial forecast will provide all the data the investors need to understand exactly what is happening with the business, and the direction in which it is headed.

Identify opportunities and risks

Business is full of risks and opportunities. The best way to identify them is through financial forecasting. You can highlight times when your company will be most vulnerable and take measures ahead of time to mitigate the risks. You will also better place your company to move fast on any and all opportunities for growth.

We can help

If you’re interested in finding out more about why financial forecasting is important, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.