Even as an effective business leader, it can be frustrating to translate your company's financial performance into a future vision. The best business owners use historical and real-time financial data to show consumers and stakeholders exactly where their company is heading. Without this financial data, planning for the future can be quite difficult!

So don’t leave the financial future of your company to chance. Let’s dive into seven effective financial forecasting methods your business can use to project sales growth, revenue, and expenditures to ensure it continues to excel and experience tremendous growth moving forward.

A financial forecast is an estimate of future economic outcomes for a company. This type of financial modeling can help businesses to predict future cash flow, expenses, and revenue. In turn, executives use these financial statements to make informed decisions across different scenarios.

The two main types of financial forecasting are quantitative and qualitative forecasting.

Companies can use various financial forecasting techniques and methods to collect and analyze financial data. For example, budget forecasting techniques help your business avoid overspending. There are also bottom-up and top-down forecasting methods to help companies predict future revenue.

The 13-week rolling cash forecast is a method that forecasts weekly cash receipts minus cash disbursements. Companies use this method when entering a period of financial distress to identify their short-term options.

These days, plenty of forecasting software options exist for businesses, too.

With better knowledge of financial forecasting, we can go over some popular financial forecasting models. Below are five quantitative forecasting methods with proof of providing accurate forecasting for companies to use during critical business decision-making processes. We also include two qualitative methods.

Although many business leaders prefer using hard data, soft data from qualitative methods is just as crucial to understanding your company’s future. Your business should use a combination of strategies when creating financial forecasts.

1. Percent of Sales

Internal pro forma statements (including income statements, balance sheets, and cash flow statements) usually use this method, which calculates future metrics as a percentage of sales. The sales forecasting method assumes that the cost of goods sold will increase proportionally with sales, so it applies the same growth rate to each.

To use this method, identify the percentage of each account’s profits related to sales by dividing each account by its sales. Assume the trend will continue at the rate you arrive at and use it to predict next year’s growth.

2. Straight Line

Straight-line forecasting assumes your growth rate will remain constant. To identify future revenue, multiply the previous year’s revenue by the growth rate.

Unfortunately, this method doesn’t consider market fluctuations or supply chain problems.

3. Moving Average

Moving average forecasting calculates business performance around a specific metric in a shorter time frame than the straight-line method. For instance, you can use it to forecast next month’s sales data.

Alternatively, you may want to know how a specific product is selling over the course of one day or week.

4. Simple Linear Regression

Simple linear regression forecasting looks at the relationship between two variables only: one independent and one dependent variable. The dependent variable is the forecast amount, and the independent variable influences the dependent variable.

As sales go up, profits should rise. But if they don’t, you need to determine why. Perhaps supply costs went up, eroding your profit margin. On the other hand, if you see that sales went down but profits went up, it likely means your business mitigated expenses, which is incredibly beneficial.

5. Multiple Linear Regression

Multiple linear regression analysis uses more than two independent variables that may influence financial performance.

For this method to work, there must be a linear relationship between the independent and dependent variables. Still, the independent variables must be different enough to interpret how each impacts the dependent variable.

6. Delphi Method

The Delphi Method is one of two qualitative methods you can use for financial forecasting. This involves consulting industry experts who analyze market conditions and create company economic forecasts.

Experts will analyze and comment on the company’s performance to identify an accurate forecast. They may also offer financial planning advice based on the estimates.

7. Market Research

Market research is another qualitative method your company can use in financial forecasting. Market research is always necessary for business planning because it helps your company obtain a holistic view of the market based on the following:

• Changing conditions
• Competition
• Consumer patterns

It’s also imperative for startups that don’t have historical data they can analyze.

To start your research, compose a hypothesis and determine the methods you want to use to collect data. Sending out customer questionnaires is one way to start when you don’t have financial data to use.

By using these financial forecasting methods, your company can better understand its future and how to better adapt to changing market conditions. Yet, we know that for business owners without a finance background, financial forecasting can seem like a daunting task.

But, with the right support, it’s not.

Review our short guide, “Fractional CFO: Yes or No?” to determine if a Fractional CFO is right for your business. Contact The William Stanley CFO Group to learn more!