Updated June 8, 2023
Introduction to Business Forecasting
Business Forecasting and Business Forecasting Techniques – Business Forecasting Techniques operate in an ever-changing and rapidly evolving environment, as each business competes with another in the market. This dramatic change can even place this business from being a local entity onto the global map. But there’s one thing that keeps it ever so pumped and up-to-date. This one thing is proper and accurate information. From the vast information logs a company harbors, financial information reserves the top place when arranged in order of importance and value.
To know the future of a growing or sustained business, you need to carefully monitor and efficiently forecast financial information and money transactions, both incoming and outgoing, using business forecasting techniques. With leaner processes adorning the scene, machinery and equipment, purchases and sales, all seem to have a say in the organization’s revenue generated and return on investment (ROI).
Whether it is a large multinational company or a small start-up business, business forecasting has proved to be an essential tool in determining where the organization is headed and what’s in store, and what needs to be taken care of in the finance department. To aid with the business forecasting of the company, the concept of cash flow has proved to be very beneficial with every implementation. So, in the article, we will delve a bit deeper into what cash flow is and how it makes such a difference in the corporate world.
What does Business Need?
An organization needs excellent business plans for a financially successful year and a great idea and product. With a business plan that takes into account the quality, quantity, as well as finances, you can rest assured that the business is sound and is self-aware of what needs to be done, and accordingly, hands out targets and growth plans to the departments and to the various managers that can collaborate to bring the business on the spearhead.
Understanding Cash Flow
To understand business forecasts using cash flow, we will need to brush up on your understanding of the concept of cash flow and its statement.
As per a definition, cash flows can be termed as:
“The total net amount of money (cash or cash-equivalents) being transferred into and out of business, especially as affecting liquidity.”
It can also be understood as the difference between the available cash at the start of a financial accounting period to the end of that particular period. Within a business, cash may come in from various sources, such as sales, investments, loan proceeds, and the sale of different assets. In the same way, cash can go out to pay for the purchase of assets, direct expenses, and operating expenses.
A cash flow budget would be looking at the following figures:
- Capital prerequisites
- Sales/revenue
- Development expenses
- Cost of goods and materials
- Operating expenses
A positive cash flow indicates that an organization’s liquid assets are considerably increasing, where it can go ahead and clear off debts, reinvest in the business it’s running, sort out all expenses, and return money from stakeholders. With this positive cash flow, it’s possible to even buffer the business from any future challenges that might come up.
A negative cash flow indicates that an organization’s liquid assets are considered on a decrease.
Cash flow is used to assess the actual quality of the organization’s income and determine its liquidity. This helps estimate whether the company can meet its long-term financial obligations.
A cash flow statement would mean simply considering all the changes in a balance sheet and income that affect the cash and cash equivalents. Once you have this financial statement, you will analyze an organization’s operating, financing, and investing activities.
With all these crests and troughs in the world of finances and cash flows, it becomes essential for businesses to ensure that they plan and anticipate cash flow conditions, taking appropriate steps towards neutralizing them. When it comes to dealing with finances, businesses are expected to do the following:
- Business Plan
- Business Forecasting Methods or Cash Flow Forecasting
I’ve numbered these steps as they need to be carried out in the sequence stated and not any way around. Establishing a business plan is highly essential for any business, small or large, to get through a year or a tenure of the next 5 years. Let’s look at these steps quickly before we latch onto an in-depth coverage of business forecasting Methods with cash flow.
Business Plan
A business plan is essentially a written document stating the business. It covers and clears the objectives, strategies, sales, marketing, and financial forecasts. It says the target the business sets, the costs involved, the competition facing the business in the market, and the strengths and weaknesses. The business plan should feature a solid contingency plan that you can revive in case the original plan fails or faces difficulties.
The business plan, in summation, will cover up:
- The customer need that you’re aiming at
- How will the business benefit in terms of profit while meeting customer needs
Once you have this business plan up and running, you can get on investors, stakeholders, and employees, as needed, to meet the goal and objective. For businesses already having a long run in the market, a constant revival of the business plan is needed as they come closer to the objectives. Once you meet a set objective, you must review the business’s needs and re-establish the plan. Thus, this would also affect the business forecasting Methods occasionally.
Business Forecasting Techniques Using Cash Flow
Cash flow business forecasting techniques are a vital way of helping you to manage your costs and indirectly collect one of the crucial elements of your business. With this technique using cash flows, you can use available information to predict how much money will come in or go out of your business at any time.
In its essence, cash flow business forecasting techniques are a cashbook that helps you project your business’ income and outgoings for a week, a month, or year. Business forecasting Methods can help organizations identify the instances when the company has extra cash or is low on cash. With this knowledge, strategists and managers can make informed decisions about what will prod the business toward profitable investments and gains.
Predicting a business’s income is tricky, and relying on assumptions can be quite detrimental. Still, in the case of business forecasting techniques, it is essential for a judgmental call to be taken as to how much the business is expecting to receive and what.
When putting forth a business plan including business forecasting techniques with cash flow, it is essential that you put forth the following three types of income forecasts to indicate that there can be a wide variation and there are scenarios that can be as wide apart as it is from a worst-case scenario and a best-case scenario:
- Pessimistic estimate
- Most Likely, or a realistic estimate
- Optimistic estimate
An existing business will find this exercise of business forecasting Methods easier to conduct as the business already has a performance threshold. On the other hand, a start-up needs good groundwork conducted, and an accountant or industry personnel will have to retrieve good benchmarking data.
Creating a Cash Flow Forecast
For business forecasting techniques, a cash flow forecast can be easily broken down into 6 essential steps and carried out. These are as follows:
1. Preparing the Sales Forecast
You will need to get up and running with this. Businesses already existing will need to look at the sales figures of the preceding year and punch in the numbers accordingly. You can use this method for the coming year by analyzing the market and how the demand is proceeding. Based on past trends, you can determine whether sales will increase, decrease, or remain the same.
New start-ups can look at a competition or consider all that can bring about cash outflows. This way, since you know your expenses, you can estimate how much money needs to be coming in. Thus, you can set sales targets and categorize and study them to avoid overly optimistic forecasts.
Info: Sales figures fluctuate rapidly and can be a shifting factor continuously within the business. They depend upon how the market is doing, how customers respond to the product or service, and how much money flows in.
2. Preparing detail sheets on any other estimated cash inflows
Cash inflows can come in all shapes and sizes, not necessarily through sales. Preparing a detail of these income sources can benefit the organization and the business forecasting Methods based on cash flows. These can include the following sources:
- Sale of an asset, loans being paid back
- Tax refunds
- Government grants
- Royalties, license fees
- More investment in the business
3. Preparing detail sheets on all estimated expenses or outflows
Providing cash outflow numbers comes in as important as enlisting the cash inflows. Enrolling these pending costs in your business forecasting techniques requires calculating how much it would take to make goods available to develop or create a product.
Once the sales are done and the actual figures are in as the year progresses, you can adjust the sales figures accordingly by conducting this step. Depending on the kind of business you’re running, you can spend expenses on various operations and administration purposes. There are the following modes of expenses that can trigger a cash outflow from a business:
- Loan repayments
- Payment to owners/rent
- Buying new assets
4. Preparing profit and loss forecast
A profit and loss forecast will allow you to combine the business’ income and costs to give you a wholesome view of your projected profit, which you expect in the future.
The benefits of a profit and loss forecast are as follows:
- You will be mindful of the tax you’re liable for once you know how much profit your business will make.
- If you change the sales, the costs will be affected. In this case, you will have a great idea if you can sustain your business in the face of changes.
- You can estimate the business forecasting Methods if you spend more as per the forecasts and take corrective, preventive actions in the nick of time.
Every overhead that you pay for needs to be accounted for. Whether it’s the printed paper you use, the landline phone bills, the depreciation of your assets, the wages you pay your employees, the professional services you avail of, software package costs, or even your company’s logistics. These little things will benefit you in your business forecasting Methods and determination of your profits and losses during the financial year.
5. Business forecasting Techniques using cash flow by collating the data
With your business forecasting techniques period all slated and decided, it now is all about the timings and cash flow. A business would need an opening bank balance- actual cash. You would make all the additions and subtractions to this amount as per the business forecasting techniques activity.
The number at the end of each projected month would be the opening balance of the following month.
6. Reviewing estimated cash flow to actuals
You must conduct this step to gauge how much your business forecasting cut. This is the most crucial step. With each period that passes, compare the forecast with the actuals you receive monthly. This way, you can bridge the gap in the future years and ensure to tap on some good analysis.
Recommended Articles
This is a guide to Business Forecasting. Here we have discussed the basic concept, business forecasting techniques using cash flow, and creating cashflow forecasting. You may look at the following articles to learn more –
