The four common types and importance of financial forecasting

Financial forecasting is a critically important planning tool, in virtually every decision they make, executives today consider some kind of forecast. They are necessary to help identify potential future influences that can affect and shape strategies, policies and goals.

Sound predictions of demands and trends are a necessity, to equip managers to cope with seasonality, sudden changes in demand levels, price-cutting manoeuvres of the competition, strikes, and large swings of the economy. Operationally, business leaders working directly in sales functions are able to optimise channel plans, pricing, promotion, and marketing spend based on quickly changing demand and supply dynamics.

In addition to financial forecasting, regular reforecasting provides companies with a shorter feedback loop to address business problems and capture opportunities, including:

• Innovating and launching new products or services
• Entering new markets or geographies
• Managing escalating costs to protect margins
• Eliminating the gap on cash flow shortfalls
• Attracting external investment, resources, and talent
• Delivering more effectively on company strategy

Four common types of financial forecasting:

Businesses conduct financial forecasting for varying purposes. Here are a few typical examples:

1. Sales forecasting

Sales forecasting entails predicting the amounts of products/ services the organisation expects to sell within a projected fiscal period. Sales forecasting has many uses and benefits, including budgeting and planning production cycles. It also helps companies manage and allocate resources more efficiently.

For more detailed information read our Sales forecasting guide

2. Cash flow forecasting

Cash flow forecasting entails estimating the flow of cash in and out of the company over a set fiscal period. It’s based on factors such as income and expenses. It has many uses and benefits, including identifying immediate funding needs and budgeting. However, it is worth noting that cash flow financial forecasting is more accurate over a short term.

3. Budget forecasting

As a financial guide for the organisation’s future, a budget creates certain expectations about performance. Budget forecasting aims to determine the ideal outcome of the budget, assuming that everything proceeds as planned. It relies on the budget’s data, which relies on financial forecasting data.

4. Income forecasting

Income forecasting entails analysing the company’s past revenue performance and current growth rate to estimate future income. It is integral to doing cash flow and balance sheet forecasting. Additionally, the company’s investors, suppliers, and other concerned third parties use this data to make crucial decisions. For example, suppliers use it when determining how much to credit the company in supplies.

For further information, including the differing transformation options, download our financial forecasting guide