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The importance of financial forecasting

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The importance of financial forecasting

Budgeting, planning, headcount management and strategic decision-making are all influenced by financial forecasts. In short, forecasting is the basis of every financial decision your people make. Forecasting  can mitigate the effects of unexpected events and foster opportunities for expansion during favorable periods.
However, for finance teams, creating more regular forecasts was challenging due to processes traditionally designed for quarterly, or at best, monthly tasks and the need to combine historical performance, actual performance and future market predictions.

Now with the arrival of modern tools like business planning and analytics platforms, effective forecasting can begin as soon as the budget is implemented. This is possible because finance teams now have direct access to consolidated data, including actuals, allowing them to easily roll it forward for continuous monthly forecasting

Better forecasting = better financial outcomes

Robust financial forecasting practices often result in improved financial outcomes, enhanced cash flow stability, and increased access to credit and investments while also helping grow your business.

Having a forecast in place enables business unit heads to strategize spending more effectively for their teams. Procurement and supply chain teams can effectively plan for capacity, manufacturing, and distribution. Sales professionals can benchmark metrics and set realistic sales targets through deep analysis of actual financial performance.

Forecasting acts as a crucial gauge for assessing the overall well-being of your business. As the fiscal year plays out, a platform with built-in forecasting measurement can assess the effectiveness of existing revenue-generating strategies across different business units, provide context for current performance, assess the market's impact (like inflation or interest rates) on your financials, and pinpoint areas of disconnection for your finance team and business units heads to adjust. For example:

To kick start budgeting

The terms forecasting and budgeting are frequently used interchangeably, yet they represent distinct processes with different objectives. Forecasting initiates the broader budgeting process by leveraging known data to model different scenarios.

Guides financial spending 

A business planning and analytics platform allows your finance team and business unit heads to create connected budgets, allowing your team to  enhance their decision-making, whether it be inventory purchases to when is the right time to recruitment new people. Forecasting ensures that decisions are grounded in accurate historical data and detailed financial projections.

Act faster 

Integral to financial forecasting is the exploration of strategies to deal with unexpected circumstances.  So when sudden changes do occur you can address them faster because the finance team can spot short term changes while also keeping an eye on the bigger business picture.

These changes have not gone unnoticed by finance teams. In a recent FSN survey, finance professionals identified forecasting as a top investment priority for the next decade. This recognizes both the growing importance of financial forecasting and the fact that current processes aren’t meeting business needs.

The foundations of financial forecasting 

All reporting and forecasting comes from your 3 key financial statements:

The Balance Sheet, the Income Statement (Profit and Loss), and the Cash Flow Statement. These templates connect to provide a comprehensive scorecard of your business.

Income Statement (Profit and Loss): Outlines business performance across various periods. This statement measures essential indicators such as revenue, cost of goods sold (COGS), gross profit, expenses, earnings before tax, and net profit.

Balance Sheet: Presents a summary of assets, liabilities, and equity during the preceding forecasting period. It serves as a financial snapshot of the company for a specific period.

Cash Flow Statement: Illustrates the cash movements within your business. The purpose of this statement is to show the net change in the cash balance for each period.

These financial statements, along with select non-financial data, are used to create a budget model and carry out 3-way forecasting, headcount planning, and rolling forecasts

Here's how:

Improving collaboration

With a single source of truth, you can empower staff across all divisions and levels to share up-to-date information. Users can update information, add comments, and see changes in real-time. Teams can provide timely, valuable inputs for the forecasting process.

Enabling driver-based planning

Finance teams can improve forecasts by incorporating both internal and external data through driver-based planning. By capturing data from various sources, your can gain greater insights into what drivers contribute to performance and how. Decision-makers across the business can then use this information to focus on key needle-moving metrics.

Increasing efficiency

Gain back time lost chasing data, cross-checking information, and rework. Capture timely, accurate information with rolling forecasts that keep pace with changing market conditions. With a clear picture of your business, managers make quick, data-driven decisions and adapt fast.

Phocas makes financial forecasting accessible. It’s simple to implement, easy to use, and can help boost business performance.

With Phocas, you can run frequent forecasts in minutes, because the processing engine is an analytics platform built to handle large datasets and run scenarios.

Businesses can embrace the future with confidence, knowing that their decisions are grounded in data-driven, forward-looking insights.

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Written by Katrina Walter
Katrina Walter

Katrina is a professional writer with experience in business and tech. She explains how data can work for business people without all the tech jargon. She is always on the look out for new ways data is being used by business people to know more and be sustainable.

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