Question

be original and use your own words

What is the purpose of financial forecasting and how would you use proformas to make your small business more successful? Provide details and at least two examples in your response.

Answer 1

Financial forecasting:-

Financial forecasts predict future income and costs for a business over a period of time, generally the next year. They are used to expand projections for benefit and loss statements, balance sheets, burn rate, and other cash flow forecasts.

The purpose of financial forecasting:-

The purpose of the financial forecast is to judge current and future fiscal conditions to instruct
policy and programmatic decisions. A financial forecast is a economic management tool that presents predicted information based on past, current, and projected financial conditions.
Financial forecasts benefit us to meet our business goals. They are a future estimation of our business finances, as contrasted with statements, which provide details of actual results or progress.

Estimating the financial future of the business is not easy, especially if we are beginning a business and don’t have a trading history. However, forecasting and making adjustments regularly will enable us to become more careful.

Monthly or weekly forecasts may be complusary when starting the business, experiencing fast growth, or having financial difficulties. Regular forecasts permit us to closely monitor the finances and develop strategies to fix problems before they become leading issues.

Monthly or quarterly forecasts may be more suitable for a stable, pestablished business.

Financial forecasts may include:

start-up costs

sales

expenses

cost of goods sold (COGS)

cash flows

Examples of financial forecasting in small business:-

1.Suppose when we’ll receive future payments by trusting on historical data. If we invoice clients using a 30-day billing cycle, we can estimate when we’ll receive payments based on those due dates. If one of our clients regularly pays us after the due date,we’ll want to factor that into our projections.

2.For example, if there was a big bill due in January, there might be rise in lead generation activities in December on the forecast to ensure enough new business came in to help cover January. These tools provide help to companies don’t overspend and run out of cash.