5 Tips to Make Realistic Financial Forecasts

5 Tips to Make Realistic Financial Forecasts

Where do you see your company in the next five years? Perhaps, ruling the retail sector with the highest market share or spreading out its wings globally. Growth and expansion are on every company’s list of priorities, but achieving these goals is no easy feat. In addition to streamlining internal operations, entrepreneurs have to plan for growth by making financial projections. These would outline the company’s financial goals, revenue streams, and expenditure schedules for the coming years. 

Usually, business owners find themselves lost in all the data and numbers, but financial forecasts are relatively straightforward. Firstly, you have to analyze the company’s past and current performance. Second, compare its profitability with key industry players in the market. Having a keen understanding of a business’s financial performance will help you develop long-term strategic plans. 

Besides, you have to set realistic expectations while preparing forecasts. If your company has 2% of the market share, it can’t go up to 52% even in the next five years. Such inaccurate forecasts can disappoint stakeholders and investors, affecting business profitability. Therefore, adopt a rational approach, assess market dynamics, and use data to prepare financial projections. In case you are foreign to the world of finance, let us help you out. 

Here are five tips to make realistic financial forecasts and make your business thrive. 

  • Begin with Revenue & Expenses

Despite having big goals, you have to be realistic when it comes to forecasting. You might want revenues to generate 7-figures in your first year of business, but is it practically impossible? Perhaps, not. After all, there are many steps you have to figure out before flying off the runway to moneymaking. Similarly, you have to predict expenses. Build a forecast model by outlining fixed costs such as insurance, rent, or utilities. 

After this, think about the costs that could fluctuate directly with the revenue. For instance, if the sales increase by 5%, your materials’ cost might also increase by 3%. It would give an insight into businesses’ future profitability, helping you invest in growth. However, if these projections seem like an uphill battle, polish up your number-crunching skills. You can complete an online masters in accounting no GMAT in as little as 20 months and become an accounting expert. It would develop a robust foundation for analyzing financial statements while helping you prepare accurate forecasts. 

  • Assess Market Dynamics 

The changing global landscape and economic uncertainties have a direct impact on business profitability. At times, the fluctuating interest rates cause discrepancies with external financing, while sometimes, rising inflation rates consume all profits. Therefore, you should assess market conditions before creating financial projections. If elections are likely to happen in the next three years, adjust your prices for inflation beforehand. 

Similarly, look out for government regulations, changing tax rates, and economic growth to ensure accuracy in all calculations. Preparing financial projections that align with market conditions will bring probable results and profits into your business, improving investment prospects. Above all, entrepreneurs should keep an eye on the money supply of the economy. The minute you notice an increase, buckle up your business for inflation. Knowledge about market dynamics can help you predict economic uncertainties and protect the business against losses.

  • Perform A Descriptive Analysis 

Everyone wants to be optimistic when forecasting business growth. It might sound like a positive approach, but businesses need empirical data and facts to ensure profitability. The same rules apply to preparing financial forecasts. Instead of shooting arrows in the dark, you have to analyze historical data to understand the company’s financial performance. Here, descriptive analytics can come in quite handy. It uses simple math and visual tools to present findings and data. 

Thus, you can see the company’s profitability trend through line graphs or bar charts and create realistic forecasts. For instance, if the sales growth is consistent, i.e., 5% since the last three years, you have to make similar projections. Likewise, if expenses are increasing by 2%-3% every year, use similar figures in financial projections. Alongside good accuracy, it will establish trust amongst the company’s shareholders. 

  • Calculate Financial Ratios 

Usually, entrepreneurs think effective financial management is all about preparing an income statement and balance sheet but analyzing them is equally essential. So, how about calculate some ratios? The standard profitability, liquidity, and debt ratios can unfold insightful data about a company’s performance, helping with forecasts. You can calculate the ‘acid-test ratio’ to discern whether the business is at risk of a liquidity crisis or not. 

Similarly, debt ratios can disclose businesses’ capacity to acquire additional funding. You can also evaluate the interest coverage ratio to determine if the business has enough profits to cover its interest payments. These insightful details will allow you to set realistic financial goals and forecasts that drive the company towards growth. 

  • Keep Making Comparisons

Once you are well-versed with the company’s internal progress and operations, start assessing your financial forecasts’ plausibility. You can compare your projections with the results of rival companies. It will unfold where your company stands financially and the key areas for improvement. Besides this, compare forecasts with the industry average to get a better idea of your growth prospects. It would also help you keep pace with the rest of the market players, ensuring competitiveness.

Remember, none of the financial forecasts can be static. Thus, if you make projections at the beginning of the year, keep assessing them for the next 12 months. Regularly evaluate how to close operating results and changes to reflect any new information. After all, the more you update your forecasts, the better prepared you will be to make the company’s strategic decisions.

Final Words

Believe it or not, every entrepreneur should gain a perspective about their company’s future. Financial projections guide a business’s spending and earning habits in the future. It gives insights into the company’s future performance, profitability, and losses. Precisely, it acts as an opportunity for entrepreneurs to upscale their current strategies and lead their business towards future success.