Achieving optimal financial gains takes a lot of work. Evaluating past performances can help you plan and achieve future financial goals for your business. Shareholders and business owners need reassurance that a business has been, and will continue to be, successful. In this blog, BAASS has laid out some important tips to improve your financial forecasting model.
What is financial forecasting?
The financial forecast is a process of predicting and planning what your business will look like financially in the future. The predictions are based on historical data collected over the years. Financial forecasting helps businesses form educated decisions and determine what areas of the business need more time and resources.
4 Financial Forecasting Models
Straight Line Model
This is a simple and straightforward method to calculate. Straight-line forecasting is simply the use of past data and patterns to project revenue growth. Previous revenue is multiplied by its growth rate in order to predict future revenue. The previous year's growth rate is assumed to be the same in the following year according to straight-line model.
Straight-line forecasting is an easy way to begin predicting financial outcomes, but it does not consider market changes or international problems.
Calculate the Percent of Sales
This method involves predicting your percentage of sales for next year or anytime in the future. Historical sales data is used to examine the percentage of each item or account’s past profits made.
To calculate this divide each account or item by its sales, assuming the numbers will remain steady. Current sales (1+Growth Rate/100) = Forecasted Sales
For example, if you are expecting a 40% sales increase this is what your formula might look like. 50,000(1+40/100) = 50,000 1.4 = 70,000
A moving average is a technique to get an overall understanding of the trends in a data set,
This method closely examines high or low demands. Moving average can be used to predict future revenue or company stock value on a quarterly or even monthly basis.
A = Average for a period
N = Total number of periods
A1 + A2 + A3 … / N
Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.
Multiple Linear Regression
If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression. As a more precise forecast, it takes into consideration a number of factors that eventually affect performance.
The dependent and independent variables must be linearly related in order to forecast using multiple linear regression. Furthermore, it must be easy to distinguish between the independent variables' effects on the dependent variable.
Increasing your company’s financial gains takes a lot of work and precise planning. Consistently tracking data and forecasting for the future can help improve your company’s financial growth and encourage educated decision making. However, not every financial forecasting method is right for your business. Speak to a BAASS expert today, and you learn which financial forecasting method is right for your business.