Why are people talking about financial forecasting?

Financial forecasting is the basis of every financial decision a business will make over the forecast period. Good forecasting estimates future financial performance based on historical data, market trends, and other relevant factors, so strong financial forecasting tends to lead to better financial outcomes, more stable cash flow, and better access to the credit and investment that can help your business thrive.

Why Financial Forecasting is Important

Financial forecasting is crucial for businesses as it serves several significant purposes and provides numerous benefits, including:

Planning and goal setting

Allowing businesses to set clear financial goals and objectives. For example, the business plans we create with clients involve clear financial measures that we then use to track progress against goals.

Budgeting and resource allocation

By estimating future revenues and expenses, businesses can determine how much they can afford to spend on different activities and investments. For instance, a business can use financial forecasting to determine when they can purchase new equipment, hire additional staff, or move to a new location.

Cash flow management

By projecting future cash inflows and outflows, businesses can anticipate periods of cash surplus or deficit and take necessary actions. For instance, seasonal businesses can use cash flow forecasting to ensure they have sufficient cash reserves to cover their costs in the shoulder and off-peak seasons or to plan for capital investment.

Performance evaluation

Allowing businesses to compare actual financial results with the forecasted figures. This helps assess the accuracy of the forecasts and identify any variances that may be impacting profitability. For example, a business may be making more sales and income, but profit isn’t improving because of increased costs.

Types of Financial Forecasts

The most common forecasts we provide for clients include:

Profit forecast / budget

Profit forecasts involve estimating the future profitability of a business. They consider revenue projections and expense forecasts to project the profit the business is expected to generate. Profit forecasts help assess the financial health of the business, evaluate the viability of business operations, and make informed decisions regarding marketing, processes, staffing and investment.

Cash flow forecast

Cash flow forecasts focus on estimating the inflows and outflows of cash within an organization over a specific period. It involves projecting cash receipts from sales, investments, loans, and other sources, as well as cash payments for expenses, investments, debt repayments, and other obligations. Cash flow forecasts are crucial for managing working capital, ensuring sufficient liquidity, and identifying potential cash shortages or surpluses.

Balance sheet forecast:

Balance sheet forecasts project the organization's financial position at a specific point in the future. They estimate the assets, liabilities, and equity of the organization based on projected revenue, expenses, cash flows, and other relevant factors. Balance sheet forecasts help business assess their solvency, liquidity, and financial stability.

Financial ratio forecast

Financial ratio forecasts focus on estimating key financial ratios that provide insights into the organization’s financial performance and health. Financial ratio examples include profitability ratios(such as gross margin and net profit margin), liquidity ratios (such as current ratio and quick ratio), and leverage ratios (such as debt-to-equity ratio and interest coverage ratio). Financial ratio forecasts help businesses assess their financial efficiency, risk levels, and return on investment.

Overall, financial forecasting helps businesses make informed financial decisions, adapt to changing market conditions, and drive their financial success. Book a time with us today, if you’d like us to work with us to improve your bottom line.

Cam | cam@sgco.nz

Amanda | amanda@sgco.nz

Nika | nika@sgco.nz

Phone: (07) 571 0032