What Form Of Financial Forecasting Works Best?
Financial forecasting is one way to predict how well your business will do in the future. You can use financial forecasting to:
– Take an educated guess of how successful a new product launch might be
– Decide whether to take specific financial actions, such as hiring more employees, giving raises, or leasing new office space
– Solicit funding from investors or loans from banks
There are two types of financial forecasting:
Qualitative, which compiles expert advice to make a financial assessment
Quantitative, which looks at financial reports and past performance from your own company and competitors to deliver a fact-based forecast
When Quantitative Forecasting May Not Work
It might seem, at first glance, that quantitative financial forecasting is more accurate. But that isn’t always the case. For instance, if you run a start-up business and don’t have historical data, you won’t be able to make an accurate quantitative forecast. Approximately three years of data is required for accurate financial forecasting.
If you are launching a product or service that is very different from anything your company has done previously, quantitative financial forecasting may not be accurate, either.
Finally, in times of an economic downturn or recession, financial forecasting methods may fall flat. However, using time series decomposition to adjust for trends and seasonality, as well as business cycles, may create more accurate financial forecasting.
Qualitative forecasting can be costly, but can provide more accurate results in some cases, including the above or if you are attempting to forecast in rapidly changing fields, like technology, or make forecasts beyond two to three years into the future.
Neither type of financial forecasting is “simple,” but the benefits to your company far outweigh the expenditures. [A financial forecast, even if it’s inaccurate, is still better than having no information at all.
A financial controller can help you choose the right type of financial forecasting, and organize it in such a way that you can get the information you need to make the smartest decisions for the future of your business.
We’ve all heard that old business saw, “You can’t improve what you can’t measure.” Nowhere is this more relevant than when it comes to your company’s bottom line, cash flow and profitability. But how does a small business owner measure these things? And how do you know your measurements are accurate?
The answer lies in having the right business and bookkeeping processes in place, along with the right person to control and manage these processes.
Here are a few steps you can take and processes you can implement to measure, and improve, your company’s profitability.
1 – Maintain up-to-date daily bookkeeping. – Daily bookkeeping ensures that Accounts Receivable invoices go out on time, so you can be paid in a timely manner, and that Accounts Payable are paid in a timely manner to avoid interest charges, late fees or bounced check fees.
When your AP/AR is running like a well-oiled machine, you can save money on interest, late fees and you’ll know you always have enough in the bank to cover expenses as they arise, whether it’s for new office equipment or to cover payroll.
2 – “Close the books” monthly to spot any inaccuracies and ensure up to date financial records. – When your part-time outsourced bookkeeper balances and closes the books, you’ll know exactly where you stand financially and can take steps to improve. This monthly “reality check” is necessary to spot errors and also so you can make fine course corrections as you steer the financial ship of your business.
3 – Review financial reports quarterly to get a snapshot of your company’s financial health, and perform financial forecasting as needed. – Quarterly cash flow reports, balance sheets and profit-and-loss statements give you a clear view of how your company is doing – and how you might improve. With a part-time outsourced bookkeeper and financial controller helping, you’ll receive up-to-date reports quarterly and have help analyzing the information in these reports so you can take actions that will benefit your company.
Financial forecasts might be needed quarterly, annually, or whenever your company is preparing to introduce a new product to market.
These are just a few of the processes an outsourced bookkeeping staff can perform to keep your company on the right financial track, improve profitability, and provide you with the peace of mind you need as a business owner.
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