6 Important Steps In Business Forecasting (methods,techniques)
Business Forecasting and Business Forecasting techniques – Businesses Forecasting Techniques nowadays 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 that a company harbors, financial information reserves the top-most place when arranged in order of importance and value.
Financial information and money transactions, incoming and outgoing, both need to be carefully monitored and efficiently forecasted (business forecasting techniques) for a growing business and even a sustained one to know the future of the business. With leaner processes adorning the scene, machinery and equipment, purchases and sales, all seem to have a say in the revenue generated and return on investment (ROI) for the organization.
Whether it is a large multinational company or a small start-up business, business forecasting has proved to be the essential tool in determining where the organization is headed and what’s in store and also 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 is a cash flow and how does it make such a difference in the corporate world.
What does a Business Need?
Along with a great idea and product, an organization even needs great business plans for a financially successful year. With a business plan that takes into account the quality, quantity, as well as the finances, you can be 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
In order to have a sound understanding of business forecast using cash flow, we will need to brush up 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 a 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, it is possible that cash comes in from varied sources such as sales, investments, loan proceeds, and the sale of different kinds of assets. In the same way, cash can go out to pay for a purchase of assets, direct expenses, and operating expenses.
A cash flow budget would be looking at the following figures:
- Capital prerequisites
- 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, as well as 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 access the actual quality of the organization’s income, determining how liquid it is, thus, estimating if the company can meet its long-term financial obligations.
On the same lines, a cash flow statement would mean simply be put into an account all the changes in a balance sheet and income that affect the cash and cash equivalents. Once you have this financial statement, you are looking at the analysis of operating, financing, and investing activities of an organization.
With all these crests and troughs in the world of finances and cash flows, it becomes essential for businesses to ensure that they plan beforehand and anticipate cash flow conditions, taking appropriate steps towards neutralizing them. For the purpose of this, businesses are expected to do the following, when it comes to the dealing with finances:
- 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 extremely essential for any business, small or large to get through a year or a tenure of the next 5 years. Let’s have a look at these steps in quick succession before we latch onto an in-depth coverage of business forecasting Methods with cash flow.
A business plan is essentially a written document stating the business. It covers and clears the objectives, strategies, sales, marketing, and financial forecasts. It states the target set by the business along with the costs involved, the competitions facing the business in the market, and also the strengths and weakness. The business plan would even feature a solid contingency plan, to be revived in the case of failure of the original plan or proceedings.
The business plan in summation will cover up:
- The customer need that you’re aiming at
- How the business will benefit in terms of a profit while meeting customer needs
Once you have this business plan up and running, you can venture into getting on investors, stakeholders, and employees, as needed in order 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 a set objective is met, reviewing the needs of the business and reestablishment of the plan needs to be carried out. Thus, this would affect the business forecasting Methods as well, from time to time.
Business Forecasting Techniques using Cash Flow
Cash flow business forecasting techniques is a vital way of helping you to manage your costs and indirectly manage one of the crucial elements of your business. With this business forecasting technique using cash flows, you will be able to use available information so as to predict how much money would be coming in or going out of your business at any given point in time.
Cash flow business forecasting techniques in its essence is a cashbook that helps you project in actually your business’ income and outgoings for either a week, a month, or an entire year. Business forecasting Methods can help organizations identify the instances when the company is in possession of extra cash or is low on cash. With this knowledge, strategists and managers can make informed decisions as to what will prod the business towards profitable investments and gains.
Predicting the income of a business is sure a tricky task to undertake and relying on assumptions can be quite detrimental, to say the least, but in the case of business forecasting techniques, it comes as essential for a judgmental call to be taken as to how much the business is expecting to receive and as what.
Note: income and profit are two separate entities and shouldn’t be used interchangeably.
When putting forth a business plan including a 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 realistic estimate
- Optimistic estimate
An existing business will find this exercise of business forecasting Methods easier to conduct as there is already present a threshold of performance by the business. A start-up, on the other hand, will need to have a good groundwork conducted, and with an accountant or industry personnel will have to retrieve good benchmarking data.
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Creating a Cash Flow Forecast
For the purpose of business forecasting techniques, a cash flow forecast can be easily broken down into 6 essential steps and carried out. These are as follows:
Preparing the Sales Forecast
You will need to get up and running with this. Businesses that are already existing will need to look at the sales figures of the preceding year and accordingly punch in the numbers. Based on analysis of the market and how the demand is proceeding, business forecasting methods can be meted out for the coming year, and based on past trends you can determine whether sales will be increasing or decreasing or locked on to the same.
New start-ups can look at competition or the can take into account all that can bring about cash outflows. This way since you know your expenses, you can estimate as to how much money needs to be coming in. Thus, you can set sales targets and categorize and study them so as to avoid overly optimistic forecasts.
Info: Sales figure fluctuate at a very rapid speed and can be a shifting factor continuously within the business. They depend upon how the market is doing, how the customers are responding to the product or service, and how much time does it take for money to flow in.
Preparing detail sheets on any other estimated cash inflows
Cash inflows can come in all shapes and sizes and not necessarily through sales. Preparing a detail of these income sources can prove to be beneficial for 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
Preparing detail sheets on all estimated expenses or outflows
Providing cash outflow numbers come in as important as enlisting the cash inflows. In order to enlist these costs that come pending in your business forecasting techniques, you will need to calculate how much it would take to make goods available for development or creation of a product.
This will enable you to adjust the sales figures accordingly once the sales are done and the actual figures are in, as the year progresses. Expenses can be spent on various operations and administration purposes, depending on the kind of business you’re running. 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
Preparing profit and loss forecast
A profit and loss forecast will now allow you to combine the business’ income and costs into giving you a wholesome view of your projected profit, which you’re expecting in the future.
The benefits of a profit and loss forecast are as follows:
- You will mindful of the tax you’re liable for once you have in your hands the figures of how much profit your business is going to make.
- You are changing the sales, the costs will be affected. In this case, you will have a great idea if you can then sustain your business in the face of changes.
- You can estimate the business forecasting Methods if you’re to 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 that you use or the landline phone bills or depreciation of your assets; the wages you pay your employees or the professional services you avail of; software package costs or even your company’s logistics. These little things will be beneficial to you in your business forecasting Methods and determination of your profits and losses during the financial year.
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 the flow of cash. A business would need an opening bank balance, that is, actual cash. To this amount, all the additions and subtractions would be made as per the business forecasting techniques activity.
The number at the end of each projected month would be the opening balance of the next month.
Reviewing estimated cash flow to actuals
This is the most important step that needs to be conducted in order for you to gauge how much of your business forecasting made the cut. With each period that passes, compare the forecast with the actuals you receive month on month. This way you can bridge the gap in the future years and ensure to tap on some good analysis.
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