Financial Forecasting

Financial Forecasting is the process or processing, estimating, or predicting a

business’s future performance. With a financial prognosis you try to predict
how the business will look financially in the future.

A common example of making financial prognoses is the predicting of a

company’s revenue. Sales figures ultimately determine where the
(commercial) organisation is at. They are therefore important indicators for
good decision-making that supports organisational objectives. Other important
aspects of financial forecasting are predicting other revenue, future fixed and
variable costs, and capital.

What makes financial Forecasting important?

Financial Forecasting is a tool for entrepreneurs and CEOs to make better
business decisions in a multitude of scenarios. It also helps with:

 Convincing investors to finance a company

 Setting objectives and budgets

Types of Financial Forecasting

Quantitative forecasts Qualitative forecasts

Pro- Forma financial Statements Expert Opinions and Visions

Time series Analysis Reference Forecasts
Cause -Effect method Delphi method
Consumer Research
Scenario Forecasts

Quantitative forecasts
Quantitative forecasts use analyses of large quantities of historical data to
identify trends and patterns. Quantitative forecasts are – generally speaking –
less susceptible to skewing than speculative forecasts. However, if there isn’t
much historical data available, the quantitative method becomes less
effective. That’s why quantitative and speculative forecasts are often used in
tandem.

Examples of quantitative forecasting methods are:

Pro-forma financial statements

Pro-forma financial statements mainly use the sales figures and expected
costs of previous years as the basis for making forecasts. More about this
later.

Time series analysis

The time series forecast is a popular quantitative forecasting technique that
involves collecting data during a certain period in order to identify trends. Time
series analyses are one of the simplest ways to use and can be quite
accurate, particularly in the short term.

Cause-effect method
In the Cause-effect method, the forecaster looks for cause-effect relationships
of variables with other variables like changes in disposable income of
consumers, level of consumer confidence, interest rates, unemployment, etc.

This method uses time series from the past for many of the relevant variables
based on which the forecast is created.

Qualitative forecasts
Speculation is something that’s done based on intuition and experience. The
human mind is able to see connections between events and understand the
context in ways that computers can’t. However, people are also prone to
having certain biases that make it a challenge to process and analyse large
quantities of data. Speculative forecasts are best used in small businesses
with little or no historical data available.

Examples of qualitative forecasting methods are:

Expert opinions and visions

For this method, the opinions and key personnel from departments like
production, sales, procurement, and operations are gathered to arrive at a
forecast.

Reference forecasts
This method is about forecasting the outcomes of planned actions based on
similar scenarios from other time periods or places. These forecasts are
purely based on human judgement.
Delphi method
For the Delphi method, a series of questionnaires is created and filled out by a
group of experts, independently from each other. After the results of the first
questionnaire have been collected, a second one is created based on the
results of the first. The second document is again presented to the experts
who are then asked to re-evaluate the answers they gave in the first
questionnaire. This process will be repeated until the researchers arrive at a
shared list of widely held opinions.

Consumer research
Companies often conduct market research among consumers. Data is
collected via, for instance, phone calls, interviews, questionnaires, or sample
tests. The enormous amount of information that is yielded by this is subjected
to analyses in order to generate forecasts.

Scenario forecasts
In this method, the forecaster generates various results based on the
outcomes of different scenarios. The management team has final say about
which is the most likely outcome of the many scenarios.