Financial forecasts

Financial forecasts allow you to keep track of your business finances, anticipate different circumstances, and be prepared to react in a timely manner.

Making these projections is not a game of assumptions, it is to establish future expectations based on past data to serve as parameters against which to measure actual results.

Only in this way can you detect variations that could affect the profitability of the company and act in time to make decisions and implement corrections in the way you use resources.

What is a financial forecast?

Financial forecasts can be short, medium, or long term and focus on predicting expected sales revenue, expected profits, and anticipated cash flow.

They also include a series of drills on how the company should act if one or more adverse situations arise, such as a financial crisis or a sales slump, which can improve your reaction capacity.

It is not about achieving forecast accuracy, but about establishing indicators that help to run the business correctly. For example, if sales are less than projected, you can intervene in time to find a way to boost them or to cut expenses. If they are higher, then you will have to make adjustments in your production or increase your orders to satisfy demand.

More than a crystal ball that reveals what is going to happen, a financial forecast offers a dashboard that shows the connections between the sources of your business resources and the uses you make of them. If there is a significant variance between the forecast and the actual data, an alarm signal will come on, requiring your attention and making a decision.

What are the elements and uses of financial forecasting?

A financial forecast forecasts the amount of revenue the business will have and projects operating expenses to anticipate cash flow and determine its level of profitability. It consists of different elements, including:

• Breakeven analysis. It is based on the estimation of general expenses and gross profit, and is obtained by dividing said expenses or fixed costs by the percentage of profit.
• Profit and loss forecast. Demand a more detailed estimate of sales revenue and operating expenses to project different scenarios, setting dates.
• Cash Flow. It is a forecast of the way in which the resources will be used and the capital needs to continue operating. If, for example, sales revenues are not expected to be sufficient, various financing options should be evaluated to maintain profitability.

Regarding their use, these forecasts can be useful in any area of??your business:

• In finance, they help estimate accounts receivable, late payments, and the financial cost of credits.
• In production, they allow calculating the costs of supplies, machinery and labor to estimate the financial needs of the company.
• In marketing and merchandising, they make it possible to stay ahead of market trends to determine if prices are right or a new product will have expected sales.
• In personnel management, they facilitate estimating the need for manpower or training to meet business requirements.

What factors determine your success?

To be successful, a financial forecast must meet certain requirements:

• Get involved in its elaboration, because nobody else knows the business. Mathematical formulas have a limit, and that is your common sense.
• Define well what benchmarks to forecast in your forecast, be it organic traffic on an e-commerce website, monthly sales by branch, accounts receivable, or inventory turnover.
• Break your prediction down into elements you can track and correlate with.
• Track actual results and compare against your forecast. This is perhaps the most crucial factor, since what is the use of making projections if you are not going to know whether or not they correspond to the reality of your sales or your income?
• Finally, implement the necessary adjustments as soon as you detect that they are. Optimal corporate management requires good timely decision making.

What circumstances affect the forecasting results?

The function of a financial forecast, as we said, is not the precision, but to anticipate the circumstances that could affect the profitability of the company. The volatile situation of current international finances and economy has only complicated the task of companies in this regard.

Even when your company is not an exporter, it will be affected by movements in the exchange market, since the costs of supplies and services may increase, as well as fluctuations in the money market, with variations in interest rates that They can affect the cost of your financing.

Globalization and the easy contagion of financial crises from one country to another invariably affect the productive base of a nation. It is all these economic and financial variables that you should consider in your financial projections to prepare for the worst-case scenario, even hoping that they never occur.

When you make a financial forecast, consider parameters to measure the results and the various favorable or adverse circumstances in the international economy, in this way you will obtain in time the key information about the business, which will help you identify what rudder you must perform to keep it profitable. and competitive and thus meet your strategic goals.