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Financial forecasting works to predict what your business will look like (financially) in the future.
MLA Companies serves small to medium businesses with financial forcasting and other financial services. Our outsource CFOs can help you understand the numbers behind your business.
A company creates financial forecast to express of its goals and priorities in concrete terms. This helps ensure they are internally consistent and help a company identify the assets or debt needed to achieve these goals and priorities.
Financial forecasting is a prediction, and a budget is a plan. When you make a financial forecast, you see what direction your business is headed in, based on past performance and other factors, and use that to anticipate the future.
When you create a budget for your business, you plan to set aside money for certain costs, taking into account your income and expenses. The budget you make should be based on info from your financial forecast, but it’s distinct from the forecast itself.
To make a budget, you need to plan how you’re going to spend money based on what you expect your finances to look like in the future. That future picture is your forecast.
Forecasting helps a company’s executive management determine where the company is headed.
Creating a financial forecast involves three steps:
You’ll need to gather past financial statements so you can see how your business has developed over time, and then project that development into the future. If you’re not looking into the past to see how your business has grown, you’re just guessing at what will happen in the future.
If you don’t have financial statements, MLA can help with that. We have an accounting support team that can help with your bookkeeping, ensuring your statements are accurate.
There are two types of forcasts—historical and researched-based. Most forecasts will include a blend of both. The blend you choose will depend on your needs and the resources at your disposal.
Historical forecasting uses your financial history to plot the future. You’re looking at past annual Income Statements, Cash Flow Statements, and Balance Sheets to see how you’ve grown in the past. From there, you can better predict how you’ll grow in the year ahead.
This is relatively easy to do and doesn’t take a lot of time, money, or expertise. The downside is that you’re only using info about your own business, and not including broader market trends, or looking at what your competition has been doing.
When you include research about broader market trends, you’re doing research-based forecasting. This may include past industry performance, accounting for new technologies and consumer trends, or trying to measure the progress of your competitors. You might look at how companies similar to yours have grown.
The benefit of research-based forecasting is that you get a detailed, multi-layered view of how your business could grow, taking into account multiple factors. This is the kind of forecast that investors and lenders need to see.
Researched-based forecasting is time consuming, and may require resources and skills that you or your team do not have.
MLA can help there as well. We have deep expertise in research-based forcasting, and our experience in with hundreds of companies, and in many industries helps us bring that to your needs.
Research-based forecasting is a good choice if you’re courting investors, or planning on rapid, aggressive growth. It’s also good if your company is brand new, and doesn’t have a lot of financial history to draw on for making projections
Once you’ve collected the information you need to build your forecast, you can create pro forma statements.
These are just like the financial statements you use each month to see how your business is performing. The only difference is that you prepare pro forma statements in advance, for future months and years.
There are three key pro forma statements you should be familiar with:
Depending on your goals, these statements will cover different time spans. Creating a financial forecast for your planning purposes involves creating pro forma statements covering six months to one year in the future.
Presenting your forecast to a lender or investor will require pro forma statements covering the next one to three years. If you’re creating a quick forecast for your own planning, you may only need to create pro forma Income Statements. If you’re presenting to lenders or investors, you’ll want to use all three.
MLA prepares financial statements as part of regular financial reporting, and for pro forma forecasts.