What are the advantages and disadvantages of financial forecasting?

If you’re running a business and need to plan ahead, you might consider using a financial forecast. This is a tool companies can use to provide a rough outline for what might happen in upcoming weeks, months, or years. 

This article will discuss the pros and cons of financial forecasting, so you can decide if it’s a smart move for your business. The topics we’ll cover include:

  • What is financial forecasting?
  • What are the advantages of financial forecasting?
  • What are the disadvantages of financial forecasting?
  • How can Countingup help me create a financial forecast?

What is financial forecasting?

A financial forecast is a tool for predicting your company’s future performance. Forecasts tend to only focus on a set period (i.e. the next week, month or years) and a single aspect of the business. 

For instance, you could create a cash flow forecast for the money you expect the business to make and spend in the next month, or a sales forecast for the next week. It would be unlikely for a forecast to show detailed information on both, though.

Forecasts also tend to be based on historical information. To make a financial forecast, you would examine relevant data from past months — business expenses, sales revenue, etc — and use this to create a model of what you think the upcoming month would look like.

Using historical data is the accepted method for established companies, but it’s possible to create a forecast even as a new business. As a new company doesn’t have historical data, you would need to use alternative sources, such as your competitor’s information or market research. 

One important thing to remember is the difference between a budget and a forecast, as they are very similar financial documents. There are two key differences: first, a budget looks at a much longer period of time than a forecast. Second, a budget acts as a target for what the company should try to achieve financially, but a forecast acts more as a tool to use when making decisions.

What are the advantages of financial forecasting?

Easier financial planning

One of the big advantages of forecasting is how much it helps with financial planning. If you have an idea of what the next few weeks will look like for your business, it’s much easier to plan out things like stock orders. 

For instance, if your forecast indicates a lot of sales in the near future, you could start planning to expand your business. On the other hand, if it shows that you might have a hard month ahead, you’ll know to budget your money carefully.

Reduced spending

The potential for reduced spending is why a cash flow forecast is particularly important. If you can see all the money your business makes and what you’re going to spend it on, you may realise you’re spending too much on certain things. You can then adjust your spending in future so that you have more money to spend elsewhere. 

Learning opportunities

A forecast is also helpful as you can keep them for later reading. If you’re trying to work out if your business has grown, it’s good to have old forecasts available, as they show how high your expectations were in the past. You can also compare them to your present forecasts. 

You can also use old forecasts to adjust your current ones. For instance, say that your last month’s forecast was inaccurate and you’re trying to complete a fresh one for the coming month. Then, you can compare the old forecast with the actual financial data from that month to create a more accurate forecast for the future.

What are the disadvantages of financial forecasting?

Inaccurate information

Financial forecasts can be inaccurate, especially when you base them on something other than historical financial data. If you create an inaccurate forecast and make financial decisions based on it, it can cause serious problems for your business. You may spend far more than you want to and make far fewer sales than you need to. You need to make a forecast as accurate as possible, or it will be very unhelpful.

Time-consuming

Financial forecasts can be complex to put together. If you don’t have any experience with them and aren’t good with financial management, it can take a lot of time to create a forecast. Even if you’re reasonably good at forecasting, it’s still a fairly time-consuming task. 

Time is a very valuable resource, particularly if you run a business alone. So before you start putting together a forecast, make absolutely sure it’s the best use of your time.

Difficult for new businesses 

Finally, a big disadvantage of using financial forecasting is that it’s very difficult to do if you’re a new business. New companies have methods that allow them to put together a financial forecast, but these methods are less accurate and more time-consuming than using your own business’s past data. So although financial forecasting has many advantages, one of its failings is that it isn’t great for startups.

How can Countingup can help you with financial forecasting

When you create any kind of financial forecast, it’s important to have easy access to all of your company’s financial data. One of the best ways of ensuring this kind of accessibility is to use financial management software. Countingup is a great example of this kind of software. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.

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