In the Arab environment, the word “prediction” is linked to actions that have nothing to do with reality. It is a loose word.
The art of financial forecasting is a very distinctive feature of any enterprise; its great advantage is not only in getting you to take calculated steps in the way of the risks you may face but also in the ability it gives you to overcome these risks with minimal losses.
Although we are aware that the term financial forecasting is a complex term,
In this article, however, we will provide you with all the basic information you need to begin preparing it yourself, consistent with your facility.
The concept of financial forecasting
Financial forecasting is the analysis of a set of financial statements and the expectation of accurate future results accordingly.
That’s a simple definition, but the process of implementing it is not easy.
The financial forecasting process varies from one enterprise to another as their financial circumstances vary.
Some of my finance managers may resort to lengthy sessions to come up with several assumptions, which need to be validated in order to reach an accurate predictive outcome.
Overall, however, the financial forecasting process is being handled with the following information:
- Income list: a financial file showing the amount of funds entered and released from the facility
- Balance sheet: This includes a thorough review of the assets of the enterprise, its financial liabilities, and equity, and the more accurate this data is, the more accurate the financial forecast.
- The cash flow statement’s purpose is to determine the amount of funds acquired and disbursed by the enterprise within a specified period of time.
As you can see, the process of financial forecasting is very important to your work.
What is the importance of financial forecasting for your business?
As an entrepreneur, the financial forecast clearly provides you with the actual course of action for your establishment.
As mentioned earlier, the financial forecast is based on basic controls: knowledge of your current financial sources, the amount of money that the entity owns at the present time, expenses, and debts.
In addition to the current demand for your products and services, it represents a near-verification income.
However, the real importance of financial forecasting lies in the following scenarios:
Attract investors because you can provide them with accurate information on how they will invest their money and what the consequences are.
- You will have a clear picture of the future of your financial establishment because you have become aware of the worst scenario you will be exposed to as well as the best.
- Setting realistic organizational goals away from fatal personal assumptions
- Preparation of tax returns some time in advance.
The process of preparing a financial forecast for your facility may seem extremely complicated, but if it is divided into simple steps, it will look simpler than you expect.
Advice: The role of this article is to clarify all substantive information on the financial forecasting process.
But we recommend the hiring of a professional financial specialist to help you prepare for the process. Here’s how you make it in three steps:
How to create a financial forecast for your enterprise in three steps
Although we know that you, as an entrepreneur or executive director of a small or medium-sized enterprise, will probably not carry out the procedures personally because they will be carried out by a specialist, we think it is important that you understand the basic steps that are helpful in making a proper financial forecast.
1. The first step Ensure the accuracy of the financial model and financial statements.
The first step in establishing a financial forecast for your enterprise is to complete a financial model, which helps to establish a clear picture of the future of the financial enterprise according to its current financial data.
In order to establish this model, it needs adequate and accurate knowledge of all the financial statements of the enterprise.
Using a cloud accounting program like Qoyod is an important aid in this process because it stores all financial transactions, and everything you need in one place can be converted into adequate reports.
In general, in order for the financial model to be completed, the person responsible at your facility will need to work in accordance with the following two methodologies:
Quantity methodology: deals with all data that can be measured and controlled.
Quality methodology: It deals with all data that cannot be objectively measured.
So the first step is to capture and collect up-to-date financial information and data on the state of the enterprise.
Here, investment in a cloud accounting program is preferable to easily extracting the required financial reports from it accurately and comprehensively.
2. The second step: a careful search for information
The research phase should be concerned with all historical information and data on the status of the financial institution in the past five years, for example, to determine the evolution of income, expenditure, assets, and debt.
You may not need comprehensive information at this stage, but some precise numbers are initially sufficient.
This phase aims to monitor all variables, such as the growth and development of the sector in which it operates, which are important for accurate forecasting.
3. The third step Create the required data.
After collecting, revising, and scrutinizing the information in the previous two steps, you will arrange it in this step to know some important elements:
Estimating expected income in the coming months: this process must include real monitoring of work structure, including sales, revenues, and net profit.
- Estimating projected expenses in the coming months Projected expenses include basic operating costs, additional expenses, salaries, and wages.
Once again, in order to create an impeccable financial forecast, a cloud accounting program must be used for its high accuracy in the balance of all the information in the three steps we have just explained.
Enterprises can proceed without any kind of financial prediction of their future, but it remains a fundamental step and an advantage in itself.
There is a difference between a person who walks on a rainy street without an umbrella—normally, he will reach his destination but be wet—and someone who carries an umbrella that protects him from raindrops.
One of the most important pillars for the success of financial forecasting is investing in a cloud accounting program that stores all your financial data and information safely and enables you to extract it in the form of specialized and accurate reports at any time.