Financial forecasting is a crucial but often underused tactic for small business owners, according to www.uschamber.com/co.
The straight-line forecasting method involves calculating changes based on historical financial statements and uses data to make quantitative predictions. The qualitative method makes assumptions related to your business goals and activities using research-based financial forecasts such as market trends, industry benchmarks and competitor analysis.
The following steps can help you write your financial forecast.
- Gather your financial statements so you can understand your past. Determine the reporting period for your financial forecast; many business owners predict income for the upcoming year. Then, improve accuracy by pulling three years of historical financial statements, such as balance sheets, income statements and cash flow statements.
- Review historical financial statements. For a straight-line forecast, crunch the numbers line by line to see how your revenue and expenses changed over time. A financial forecast template in Microsoft Excel or Google Sheets can make this process easier.
- Make a financial forecast or straight-line prediction. For a straight-line prediction, look at your historical performance and find the average rate for each category. Apply this figure to future years for each section. However, if you have an accountant, you can make assumptions for pro forma statements, which make predictions that may differ from your historical data.
- Start small, dream big. Once you have a basic financial forecast, play with the numbers to figure out how to reach your business goals. In addition, think about future debt payments or large expenditures that will affect your financial statements.
Be sure to update your financial forecast regularly so you can catch potential cash flow problems or adjust expectations. Learn more about financial forecasting and view examples.
