The Purpose of Forecasting in Business

Forecasting is vital for business success. It allows you to make informed decisions about the future of your business and helps you to stay ahead of the competition. In this blog post, we will discuss the purpose forecasting serves in business, and how it can help you to achieve success!

What is Forecasting?

Forecasting is making educated guesses on a business's performance in the future. To do this businesses use historical data and known factors that will affect their cash inflow like price increases, loans and staff wages.

Cashflow Forecast Length

Deciding the period you want your cash flow forecast to be over is something you should consider.

Short-term forecasting isn't very common but can be useful depending on your business's position. Short-term forecasts are generally over a month period and include day-to-day expenses and income.

They are most often used when businesses need to ensure they can remain liquid during short periods and make repayments to outstanding creditors.

Medium-length forecasting is generally over a 3–4 month period. These are used in the same way as short-term forecasting, however, they can also assist with debt management and interest reduction.

Long-term forecasts are generally looking at a 6–12 month period. These forecasts are most often shown to banks to get finance as they can highlight a business's ability to repay a loan. These forecasts are also used to annually budget and to measure a business's growth ability.

Forecasting Methods

There are many forecasting methods including quantitative forecasting methods and qualitative techniques. These quantitative forecasting models and qualitative forecasting techniques can be complicated to understand but most people use quantitative methods when forecasting.

There is no right or wrong forecasting technique, it all depends on your business's individual circumstances, and this should be evaluated when choosing a forecasting model.

Coleman Advisory uses the raw data from your accounting software to create a draft cash flow forecast for data analysis and revision. We then estimate seasonal fluctuations, price changes, staffing changes, consumer demand, new costs, and any expected changes in the upcoming year to create a final forecast.

No matter what forecasting method or forecasting procedure you use, forecasting should come close to matching the future actual data. To do this most forecasts have to use past data to find trends and patterns that can be applied to the future.

It is recommended to create an actual vs forecast report each month to compare the projected cash flow against the actual cash flow. This allows businesses to judge the accuracy of their forecasting methods, highlight abnormalities and track cash flow performance.

What is Forecasting used for?

Forecasting is used by large and small businesses for many different reasons. Forecasting is beneficial when businesses are applying for finance as the use of historical data to predict future turnover and profit provides reassurance to the finance company that the loans can be paid off on time.

Most businesses primarily use forecasting for loan approval, however, it has a range of other benefits that can give your business an edge. Forecasting can help your business make better management decisions. By having accurate forecasts, your business will be aware of its future financial positioning so you can prepare and make informed decisions.

Businesses will also look at their forecasted cash flow results and compare them to the actual results to see if they are reaching expected targets. This informs the business owners and managers if they are staying on track with forecasts or if they need to make any changes to address underperformance.

Forecasts also provide assurance for businesses knowing that they will likely be able to pay expected expenses if their cash flow forecast is positive. Accurate forecasting with planning can ensure that you can pay staff and suppliers on time. This can help provide valuable peace of mind for business owners and managers.

Do you Need a Cashflow Forecast?

Whether you are looking for finance from a bank or just want to control your cash flow better for liquidity and debt management, Coleman Financial Group can help. For our business advisory services we'll draft your Cashflow Forecast using the information from your accounting software.

We'll then send you the draft to review, along with some questions to make sure our assumptions are correct and to find out if we need to adjust the Cashflow Forecast for any changes you're aware of in the next 12 months.

We'll then meet with you to review the draft Cashflow Forecast and discuss seasonal fluctuations, material changes to last year's cash flow, any implications of staffing changes, significant one-off items, tax payments and timing, and capital expenditure. Following this meeting, we'll finalise your Cashflow Forecast in your accounting or reporting software.

The information provided on this tax blog is intended for general informational purposes only and should not be considered as professional tax advice. While we strive to ensure the accuracy and currency of the content, tax laws and regulations are subject to change, and individual circumstances may vary. We recommend consulting a qualified tax professional or seeking advice from the Australian Taxation Office (ATO) for personalized guidance tailored to your specific situation. The authors and creators of this blog disclaim any liability for errors, omissions, or inaccuracies in the information provided. Use the information at your own discretion, and always exercise caution when making financial or tax-related decisions.