In business, it’s critical to have an accurate idea of your financial position in the months and years ahead. Your historical data has numerous predictors that can provide this insight.
The process of using this data is called financial forecasting, and NJ businesses depend on Vilardi and Co. for it and other financial services.
Let us help you understand financial forecasting so you’re better prepared for the future.
What is financial forecasting?
Financial forecasting is using your company’s historical data to determine the direction of future trends. Doing so helps you understand how your company’s performance and financial health may change with time.
You can forecast your income statements and balance sheets. And you can then use the data from those two financial statements to create a cash flow forecast.
These projection-based statements are known as pro forma financial statements. And this process that gives a detailed overview of your company’s financial health is called three-statement modeling.
Financial forecasting methods
Let’s begin with the forecasting methods used to project future performance:
You use historical figures from comparable time frames and trends to predict future revenue growth.
You identify your moving average by exploring the underlying pattern of a data set, which you use to establish estimates of future values. The most common of these are three-month and five-month moving averages.
Simple linear regression
This tool helps you establish the relationship between an independent and a dependent variable that may affect revenue. An example is how advertising affects sales.
Multiple linear regression
Unlike simple linear regression, multiple linear regression uses several variables or predictors.
While the forecasts that rely on your business’ historical financial data are quantitative, others can be more speculative and intuition-based. These are known as qualitative forecasts.
The inputs that go into this type include expert opinions, scenario projections, consumer research, and industry benchmarks. Qualitative forecasts can be useful for recently formed businesses that have little financial data off of which to make projections.
Projections that help you peer into your business’ health and future
Now, we’ll look at some of the individual forecasts that help you understand your company’s future performance.
While small business owners may fear they’re missing out because of the cost of hiring a full-time finance expert for these projections, the affordability of fractional CFOs makes their expertise accessible.
It’s possible to project sales for up to three years based on past data. For the first year, sales projections can be on a monthly and quarterly basis. A sales forecast anticipates a market’s response and the effect on revenue.
A cost forecast calculates the business’ fixed costs, such as office rent and payroll over a coming accounting period. It also calculates the variable costs, such as packaging, wages, and commissions.
Cash flow forecast
Cash flow projections are based on the balance sheet and sales forecast. They show how much money your business can expect to receive and pay out over a set period.
Income statement forecast
Income statement forecasts are also known as profit and loss forecasts. They predict your business’ financial performance.
Ensure your company’s preparedness with financial forecasting from NJ experts
With experienced financial forecasting in NJ, your business can approach the future with confidence and clarity about its direction. Whether that means capitalizing on opportunities or bracing for impact, you emerge more profitable and resilient.
Since 2000, Vilardi & Company has been helping businesses throughout New Jersey and the NY metro area incorporate this foresight into their financials and strategies. We want to empower your company’s success, too.
Contact us for a consultation today!