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8 Techniques of Financial Forecasting:

Qualitative and Quantitative Methods of Financial Forecasting There are two

ways of developing financial forecasting by using either a qualitative method
or a quantitative method.
A. Qualitative Financial Forecasting Methods
The qualitative methods use the non-quantifiable or non-measurable data for forecasting purpose. Herein,
the manager gives due importance to the consumer’s opinion or expert judgment for arriving at suitable
results.
These methods are widely used when past data is not available. For example, it would be wise to research
consumer’s preferences while launching a new product in the market. Some of the qualitative methods
are:
1. Executive Opinion
The opinions of the key staff hold great value. For example, the sales team comes in contact with the
customers and thus, they know their needs and requirements better.
Under the executive opinion’s method, the opinions of experts of different departments such as
production, sales, purchasing, and operations are taken to predict the future.

2. Market Research
The management team can undertake complete market research wherein a sample of current and future
customers will be selected to discuss and predict a good or service.
With market research, the forecaster can figure the demand of a particular good or service. Whether the
customers would like to buy a new product or a new variant of the existing product or not? However, this
forecasting method is a bit expensive and hence may not always be used.
3. Delphi Method
The Delphi technique revolves around a structured method. A facilitator is there to ease this whole process
of deriving the forecasts from a set of experts.
The first step of this method includes the gathering of data through the medium of questionnaires. Multiple
rounds are there. The analysis of data is done at every stage. So, the result of preceding rounds forms the
basis of the next round. The process of collecting and analyzing iterations continues until they reach a
consensus.
Consequently, the managers prefer the Delphi method for long-term forecasts only, given the amount of
time and effort required in this technique.
4. Reference Class Forecasting
The reference class forecasting is based upon human judgment. Under this method, the forecaster predicts
the future according to similar scenarios in other places or times.
The manager/forecaster makes the judgment on the expected outcome of a planned action in the future.
Scenario Writing
5. Salesforce Polling
This method uses in-depth knowledge of the sales force about customer behavior. The insights help in
improving the product/service as per the consumer expectations. The forecaster calculates the average of
salesforce polling to derive future estimates.

B. Quantitative Financial Forecasting Methods

In the quantitative methods, the forecasters use past observations to generate forecasts. Usually, a
forecaster manipulates and analyzes the existing quantitative data through various quantitative and
statistical tools to arrive at the most accurate results.
Some of the quantitative methods are:
1. Causal methods
In the causal method or, cause and effect method, the forecaster studies the relationship of one variable
with another relevant variable. Consequently, a change in one item causes the same change in another.
The regression analysis is a widely used causal method. It can further be divided into:
2. Simple Linear Regression Method
The simple linear regression focuses on the distribution of two variables. Here, the forecaster studies the
bivariate distributions and calculates the estimated values of the dependent variable according to the
values of the independent variable.
3. Multiple Regression Method
It is an extension of the simple regression method where a variable is dependent on more than one
variable/factor.
For instance, sales could depend on more than just one variable. The analysis of one or more of those
factors determines the sales forecasts.
Some other examples of the causal financial forecasting techniques are:
4. Days Sales Financial Forecasting Technique
It is a traditional technique used to forecast the sales by calculating the number of days sales and
establishing its relation with the balance sheet items to arrive at the forecasted balance sheet. This
technique is useful for forecasting funds requirement of a firm.
5. Percentage of Sales Financial Forecasting Technique
The sales forecast paves the way for getting a clear picture of the expected future sales with which a
manager can forecast the financial requirements of the firm. Any change in the sales will have much effect
on other variables of the balance sheet particularly, the assets and liabilities.
Thus, it’s crucial to make the sales forecast and establish its relationship with other variables as accurately
as possible.
6. Time-series methods
This is another popular quantitative method. It involves the gathering of data over different periods for
identifying trends. Then, the forecaster analyzes the trends to derive the forecasts mainly for the short-
term.
For example, simple averaging and exponential smoothing are popular time-series techniques.
Financial Statements for Financial Forecasting
The financial statement is another important tool in the hands of a manager, especially when there is
an acquisition/ merger or, at the time of the formation of a new company.
Therefore, investors need these statements before providing the required capital to a firm. These
statements cover the costs and sales figures of the previous two to three years after excluding some one-
time costs.
7. Projected Funds Flow Statement and Projected Cash Flow Statement
The projected funds flow statement represents the data about further procurement of funds from various
sources and their application in assets or, repaying debts, etc. whichever the case be. It helps in
understanding the impact on working capital by establishing a relationship between sources and
application of funds.
On the other hand, the projected cash flow statement primarily focuses on the inflow and outflow of cash.
It covers the items which result in the realization of cash or expenditure in cash, . It is a detailed statement
of the projected cash flows generating from the operating activities, investing activities and financing
activities. Therefore, it proves to be a useful tool for forecasting the financial requirements of the
company.
8. Projected Income Statement and Balance Sheet
The projected income statement is prepared on the basis of forecast of sales and anticipated
expenses for the period under estimation. The projected funds and acquisition or disposal of
fixed assets and estimation working capital items with reference to the estimated sales.