Financial Forecasting For The New Financial Year

When it comes to financial forecasting for the new financial year, it pays to start planning early. 

After all, the sooner you begin to look ahead, the sooner you can put measures in place to start achieving your financial goals.

But with most small businesses rushing to get their affairs in order for the end of the financial year each June, there’s often a temptation to let the next couple of months drift by without much consideration for the year ahead.

Fortunately there’s a ready-made solution. It’s called financial forecasting, and you can use it to track past performance and start modelling for the new financial year. 

And while there will always be an element of guesswork to any financial forecast, at the very least what it should provide is an informed framework you can build your business plans around for the upcoming financial year.

What Is Financial Forecasting?

Most small businesses are familiar with the concept of financial forecasting and include at least some element of it in their annual planning. But as useful as it is, it’s far from an exact science. 

At its core, however, financial forecasting involves using past financial data and market trends to shape future decisions around your business. 

It includes an analysis of historical data such as cash flow, sales, revenue, and expenses, and can involve both quantitative methods—such as percentage of sales, straight line forecasts, moving averages, and linear regressions—as well as qualitative methods such as market research and use of the Delphi technique.

Despite the different approaches to financial forecasting, the end goal is simply to ensure your business has an accurate picture of past performance on which to model future outcomes.

It’s a strategic tool businesses employ to help identify potential growth opportunities, allocate resources more efficiently, and mitigate risks more effectively. 

What Problems Does Financial Forecasting Solve? 

Just say you’re a retail business planning for the next 12 months ahead. 

While a financial forecast can’t predict what kind of sales you’ll generate, what it can do is help predict seasonal fluctuations for demand. This in turn can help you optimise your inventory levels, hire any casual staff that might be required, and better inform your marketing strategies.

Doing so can also help you stay one step ahead of your competitors in the retail marketplace, and align and adjust your marketing efforts as you go.

Financial forecasting is also vital when it comes to budgets and effectively allocating financial resources. By using historical data to analyse the peaks and troughs of previous financial years, you can more accurately allocate resources across various campaigns and departments.

Using data to more accurately allocate resources to a range of budgets, personnel, and tools of the trade helps to eliminate financial waste and ensures your money is being spent where it is most needed.

Using Financial Forecasting to Improve Your Cash Flow

Of all the aspects of running a small business, maintaining a consistent cash flow is undoubtedly one of the most stressful. After all, it takes a steady stream of income to ensure you’ve got the capital needed to stay in business for this month and beyond.

But maintaining a steady cash flow is easier said than done when sales can ebb and flow, and some months are stronger than others. That’s where financial forecasting can help.

By analysing how the business performed over the previous financial year, you get a better overview of future inflows and outflows—which in turn helps you to better manage your overall cash flow. 

Anticipating any potential gaps in cash flow allows you to proactively implement strategies to bridge them—such as securing short-term financing to account for any shortfalls, or adjusting payment terms with suppliers and customers.

Financial forecasting also helps businesses avoid overcommitting on expenses during periods of low revenue. This helps prevent cash flow crunches before they happen, and ensures the business remains fully operational and financially stable even during down times.

Strengthen Your Borrowing Capacity With Financial Data

While running a small business can be challenging at the best of times, it can be doubly so if you can’t afford to borrow for future growth or expansion. 

Once again, financial forecasting can play a crucial role in helping to determine your borrowing capacity and ability to repay any loans.

Any finance lender worth its salt will expect accurate financial projections in order to assess the ability of your business to service its loans. That means it’s vital to present a well-informed financial forecast to such lenders, in order to demonstrate creditworthiness and reduce any perceived risk.

Presenting an insightful financial forecast drawn from past performance data can help you secure lower interest rates and more favourable borrowing terms, allowing you to reinvest any savings back into the business.  

Identifying Risks Before They Become a Problem

In an era of unprecedented interest rate rises and ever-tightening budgets, perhaps the most obvious reason to undertake financial forecasting is to identify risks before they become a problem.

Not only can financial forecasting help you take a proactive approach to risk management—rather than merely reacting to problems as they occur, and risking a credit crunch when they happen—it can also help you develop contingency plans ahead of time.

Forecasts based on past financial results can help you respond swiftly to market shifts and mitigate the impact of any adverse events before they occur.

Well-informed financial forecasting also helps you stress-test a variety of financial models, allowing you to simulate a range of scenarios to gauge your business’ resilience against potential economic downturns and industry-specific challenges.

And while no financial forecast can ever accurately predict exactly how much revenue you’ll generate in any given month, they can certainly help you ward off disaster long before it strikes.

Need a Hand With Your Financial Forecasting?

Financial forecasting isn’t exactly the most glamorous part of running a small business—but it is an extremely important one.

With the new financial year upon us, now is the ideal time to start crunching the numbers and planning for the weeks and months ahead.

If you need help with any element of your financial forecasting, just drop me a line at [email protected] and let’s schedule in a chat.

We’re here to make more possible for your business.