Forecasting is an accounting method which uses current and past data to predict future trends. It can help your company to budget, create strategy for long-term goals and make decisions about which projects to pursue.
To forecast future costs and trends, an accountant considers your company’s historic data in combination with market dynamics. The current accounting software on the market can make accurate projections, and accountants have the skill to interpret and apply this data for your business.
Forecasting is a priority for any business. Without an idea of your future cash flow, it’s difficult to keep developing and optimising. Making use of forecasting gives you a clear picture of your company’s growth and a game plan for the future.
How Does Forecasting Work?
Forecasting is a data-based projection model which can use several different methods. Straight line, moving average and simple linear regression are all methods which can give a slightly different picture.
Your accountant will be able to apply these methods to give you the overview you need, alongside paying attention to these factors:
1. Movements in the Market
By anticipating future market conditions, accountants can predict how your business’ costs and revenue will be affected.
Changing factors within your market that could affect your projected costs and returns include:
- Interest rates – these affect the costs of borrowing money and returns on money lent.
- Inflation rates – these change the current value of future returns.
- Developing technology – this could change the landscape of a market and which of your in-house processes can be automated.
- Raw materials availability – this could affect the cost price of a product and when and where to purchase materials.
2. Costs of Your Business
An accountant will then look at your internal financial history – the most important factor when forecasting. By looking at your current and previous costs and returns, you can get a sense of how these trends will continue. This gives an idea of how efficient your business will be in the future.
This is great for project management as you can optimise your processes to incur less costs than you have in the past.
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3. Returns of Your Business
At the same time as considering costs, your accountant will look at your past returns to predict how much money the business will be bringing in.
Having an understanding of what you’ll be making in real-time moving forward can inform how you distribute costs, how many employees you can hire and what you can invest in company development.
Different Uses of Forecasting
Budgeting
With the data gathered through forecasting, your accountant can help you to plan your budget for an upcoming period. The process of budgeting includes:
- Setting goals
- Communicating these goals to the rest of the organisation
- Allocating resources within the company
- Managing performance to achieve these goals.
After completing a cycle of forecasting, your accountant can look at previous expenses and returns to work out the costs of proposed projects and at what stage the costs will occur.
This is worked out by analysing each step of a proposed project and accurately working out expenses. This could include the costs of producing a product, labour and marketing.
This in turn informs how you will finance and pace a project with a steady sense of the results.
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Optimising Workflow
Evaluating past data can give you a clear sense of what worked and what didn’t. This allows you to optimise your workflow – where you should focus attention and what to avoid in the future.
You can get a thorough understanding of how effective each project is by giving your initiatives set time periods coupled with clearcut methods and goals. The more you segment projects in this way, the more data you will have to pull from and optimise your workflow.
Running analysis of your cashflow alongside tracking your projects can help you easily grasp your future direction.
Read Now: An Accountant’s Guide to Creating a Cashflow Statement
Optimising Marketing
Lastly, forecasting can provide useful metrics to help you optimise your marketing. Just as knowledge of your company’s ongoing ROI can help you decide which projects to pursue, it can also inform which methods your marketing team use.
A key element of successful marketing is constantly optimising to create the most efficient ads and content and place your funding in the most useful places.
Forecasting can provide vital metrics for determining your marketing team’s plan of action, giving you the tools to optimise and develop.
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If you think your business could benefit from forecasting but aren’t sure where to start, contact one of our expert advisors at Count today.