What is Forecasting ?
In its simplest terms, forecasting means to “guess” or predict the outcome of the future. Forecasting is a process of making predictions by using past and present data. Through the usage of extrapolation, identifying trends and mathematical analysis, businesses try to come up with a plan regarding how and when their money will be generated and spent. At the end of the forecast period, you should be comparing your actual results to your predicted results to identify where you went wrong. Thereafter, you will make tweaks and adjustments to your next financial period forecast or budget.
Types of Forecasts
There are many different types of forecasts. For example :
Sales forecast – Is a plan that shows the predicted number of products that you expect to sell each month plus the expected price for those units. It also shows the total revenue which we all know is simply the Selling Price multiplied by Quantity.
Materials or inventory forecast – Is basically a plan that shows how much raw materials or inventory supplies you need to buy, based on your sales forecast predictions.
Payroll forecast – Is a plan that shows the expected cost of keeping staff in your business.
Cash flow forecast – Which I think is the most important forecast for a business. It is a prediction of your expected cash inflows and outflows over a financial period. It is a plan or roadmap of how your business intends to create and spend its cash reserves. It shows the approximate month when you expect to receive or spend cash, plus it also tells the reader exactly what you intend to spend your cash on.
Capital expenditure budget – Is a list that sets out the timing as well as the expected amount of money to be spent on machinery, furniture and capital equipment.
Income statement and balance sheet forecasts – As the name suggests, these are nothing more than predicted financial statements that reflect the totals of the smaller budgets and forecasts. It is required by the banks and investors for every single business plan.
Loan amortization schedule – Is a calculation table that shows the timing and amount of your loan repayments as well as the predicted interest that will be paid on your bank loan. It also shows how the balance of the loan fluctuates over time.
There are other forecasts and budgets such as investments forecast, marketing and advertising, accounts receivable forecast, tax budgets etc. etc. However, the sales, inventory, payroll, cash flow, income statement, balance sheet and loan amortization forecasts are the usual components that are requested most frequently by the banks in business plans. Furthermore, if you understand the basic concept of how to prepare one type of forecast, you can easily apply the principle to any other type of forecast.
