Financial Forecast: 5 Ways to Improve the Accuracy of the Same!
Financial Forecast: 5 Ways to Improve the Accuracy of the Same!
Having an accurate financial forecast can be one of the most crucial factors in scaling a business successfully. After all, knowing where your company is leading and how it is performing can help leaders make decisions on hiring, expanding, or creating a new business line.
A business strategy cannot be successful without an accurate financial forecast. The Institute of Business Forecasting and Planning (IBF) reports that even a one percent improvement in accuracy can have a significant impact. The IBF study shows that for consumer goods companies with sales of USD 100 million every year, a slight improvement of 1 percent can lead to savings of nearly USD 0.3 million to USD 0.9 million annually.
Developing a reliable and accurate financial forecast is a challenging task for many fast-growing companies. Poor predictions make it difficult to reach strategic decisions and manage the expectations of investors and stakeholders.
So, how can you predict those figures accurately! Let’s find out.
Five Ways to Improve the Accuracy of Your Financial Forecast
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1. Understanding Your Business and the Big Drivers
The first step in understanding your business is to look at the revenue and expense streams. According to these questions, you can identify the principal drivers of change. This process doesn’t have to be difficult, and in most cases, the answers come down to rates and volumes.
When analyzing the revenue, you need to find out pricing relationships and future volume projections. With costs, you should understand unit prices, along with the functions you can expect with scale. Recent history is a common driver of financial results that you should grasp.
2. Timely and Accurate Data is Critical
You can’t produce a reliable forecast if there is nothing to measure. If you are doing your forecasting with real operating data, you can be certain that it hasn’t been altered or modified in any way. So, the fewer barriers standing between you and the data, the more accurate and practical it will be.
You should always ensure that you grasp exactly what the data represents (e.g., what are the specific activities captured by the data) and understand the wider context. Although anecdotal information can be interesting, you ought to grasp how the data connects with global activity.
3. Redesign Your History before you try to Design the Future
Rates and volumes are calculated by working backward from revenue and cost drivers. Using the forecast method, we reverse engineer historical rates and volumes. First, we identify the drivers that have impact on the forecast and are likely to affect it.
By modeling historical revenue and costs accurately based on these historical drivers, you can be confident that your forecasting method is sound.
Even if you are forecasting several periods out, ensure that your forecast remains accurate by stopping and reevaluating periodically.
4. Be in Touch with Key Business Owners frequently on Future Driver Assumptions
Challenge the assumptions you make about future drivers based on the experience you develop.
When considering assumptions based on sales, for example, determine how they compare with past performance. If significant changes to operating practices are still required, ensure that the timing of those changes is really.
5. Record Your Confidence Level in the Results and Improve Where Necessary
Be conservative with your target goals, volumes, ratios, and margins. Be realistic, and err on the side of caution when in doubt. Be extra careful not to tie yourself to an overly optimistic forecast that may render the goal unattainable and undermine your credibility.
When you provide your organization with a complete spectrum of forecast scenarios, such as the best case, likely case, and worst case, you give more protection against errors and ensure your organization fully considers all possibilities.
Want to Outline an Accurate Financial Forecast?
Do you want to know more about financial forecast and how to do it the right way? If yes, let Daveron Networking assist you through the process. Our team of experts will help you establish the forecast.
Ready to grow your business? Speak to our growth experts and learn how to expand your customer base, drive revenue growth, and optimize your business operations.
