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Explain The Importance of Financial Forecasting For A Small Business

Financial forecasting is important for small businesses for several reasons. It allows business owners to plan for the future by projecting financial metrics like profits and losses. This helps owners understand what financial performance they want to achieve and how to manage the business to meet those goals. Creating financial forecasts also enables owners to measure progress against their plan, make important management decisions with accurate information, determine future financial needs, understand key drivers of the business, and prepare for different scenarios that may occur. Overall, financial forecasting provides critical visibility into a small business's current and future financial status.

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48 views2 pages

Explain The Importance of Financial Forecasting For A Small Business

Financial forecasting is important for small businesses for several reasons. It allows business owners to plan for the future by projecting financial metrics like profits and losses. This helps owners understand what financial performance they want to achieve and how to manage the business to meet those goals. Creating financial forecasts also enables owners to measure progress against their plan, make important management decisions with accurate information, determine future financial needs, understand key drivers of the business, and prepare for different scenarios that may occur. Overall, financial forecasting provides critical visibility into a small business's current and future financial status.

Uploaded by

ccm intern
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FIN 5417 Journal 2 Aashi A Shah

Explain the importance of financial forecasting for a small business.

Financial Forecasting- A prediction concerning future business conditions that are likely
to affect a company. A financial forecast identifies trends in external and internal
historical data and projects those trends in order to provide business owners with
information about what the financial status of the company is likely to be at some point
in the future.
To have control over your business and over the operations it all begins with financial
visibility and critical business numbers you need to be all over like a rash, once the
owners have clarity over the current performance its then time to start to manage
future results. Owners need to envision what they would like their profit and loss to
look like and then to managing that. This brings the analysts, accountants, and the
owners to the whole concept of forecasting.
To fully understand the company’s your financial position, you need to understand at
least three statements in both the past and the future, these are the profit and loss
statement, balance sheet statement and the cash flow statement. With regards to the
past these statements show you how the business has performed to this point in time.
By doing a thorough analysis of those and studying each component in detail, that will
give the owners a great insight in terms of what changes owners need to make to
improve future results of the business.
Whatever maybe the precise purpose to financial forecasting it is vital for a business to
be successful and has the following benefits:
To roadmap what you want to achieve: to chart a course of where you want to get to, if
you aim that is probably what you will get. A forecast, in this case in the form of a
budget, is a roadmap of what you are aiming to achieve and how the owners intend to
get there. What are the sales predictions and with those predictions what is the bottom
looking like, what has the owners planned to get there. A budget is the same as a sea
skipper, plotting the course of where you want to get to. There will be winds to take
advantage of obstacles to navigate, conditions to allow for the potential for unforeseen
events! If there is no plan to what to achieve, it should not come as a surprise if the
business does not expand.
To measure how you are progressing against your plan: No pilot sets the course and just
flies. Survival in any business, as on the flights requires lot of checking in against your
planned course, reading the instruments and adjusting on a semi constant basis.
Comparing your budget against your actual results and monitoring the differences
provides the feedback you need to take corrective actions. Corrective actions are
required to get back on track, or hopefully improve on the plan.
Management Decisions: As a business owner and manager, important decisions need to
be made on a regular basis. The accuracy and correctness of your decisions are largely
dependent on your true understanding of your business position. Solid management
accounts and financial forecasts you will be able to learn from the past and more
accurately predict the future. It will also keep you looking ahead, making you more likely
to foresee market changes and competitive challenges. Forewarned is forearmed.
Financial requirements: Financial forecasting plays an important role in calculating the
financial needs of your business. Business needs adequate capital. Whether it is the
fixed capital or the working capital, financial forecasting helps you make accurate
predictions about what your business needs to succeed. If the business is in a growing
stage, further capital may be needed for your new venture. Forecasts will help you
decide if additional private equity or borrowing is necessary or any further capital needs
from investor is needed.
Understand the key drivers and modelling different scenarios: A well-constructed
forecast will enable you to see what the key drivers of your business area. There are
usually 3/4 critical numbers in any business, like the sales, operating profits, net profits,
debt to equity ratio. If you look after those numbers, the business tends to do well.
Once you have a financial model with clear key drivers, you should then be able to
change those to see what impact that has on the results you are trying to achieve. It is
often useful to introduce sensitivities into your forecasting and have at least best, worst,
and expected scenarios.
Be prepared for different eventualities: When you have a forecast of what decisions to
make when there is a sudden 30% reduction in the sales, the owners can be clear about
what needs to be done. Also, Cash flow has a great influence on the success of your
business, and if not treated properly managed, can start controlling your operations
and decisions.

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