Taking on and investing in a large project can be risky, which is why financial forecasting is pivotal in making decisions in the face of uncertainty.
From asset pricing to risk management, there are many ways to forecast what the future might bring financially, to determine if an investment might be profitable.
If you’re thinking about taking on a large construction project, technology should play a significant role in your decision-making. How would the use of technology help to make your investment profitable, for example?
Taking on a large project can be overwhelming. In this guide, we’ll go over some basics to help you develop a better understanding of how your financial forecasts should look.
What Is a Financial Forecast?
The purpose of a financial forecast is to predict what your business will look like (financially) in the future, based on current and future fiscal conditions.
These conditions help to guide programmatic decisions and policy. A financial forecast is essentially a fiscal management tool. Financial forecasting models present estimated information based on current, past, and projected economic conditions.
Documentation makes those predictions concrete and provides reference points to check back on and adjust accordingly. Thus, financial forecasting is not unlike these financial statements any business uses every month to monitor performance:
- Cash flow statement
- Income statement
- Balance sheet
The only difference is that with financial forecasting, you’ll also prepare those documents for future months and years. If you’re using budgetary forecasting to consider an investment, you should create statements that cover at least the next 1 to 3 years. If you’re creating financial forecasts for planning purposes, your statements should reflect the next 6 months to 1 year.
Budgetary Forecasting Steps
Here are 3 easy steps to follow in your financial forecasting modeling.
1. Gather All Your Past Financial Statements
If you don’t look to the past to determine how a business has grown, you’re guessing, not forecasting. If it’s a new venture you’re considering investing in, you can always look at similar businesses’ past financials.
Any reputable bookkeeping software should be able to generate those financial statements for you.
2. Determine How You’ll Make Your Projections
Other than previous records, you can use all different data to play around with projections and make them more accurate.
Your financial forecasts will probably include both historical and research-based information.
3. Prepare Your Statements
Financial forecasting statements are called “pro forma” statements. Get ready to spend a fair amount of time crunching numbers as you put it all on paper.
Keep in mind that if you strive to make the best, worst, and normal case predictions, you’ll be better prepared to make essential decisions and determine if you’re looking at a good investment.
Financial Forecasting Can Be Empowering
While it may seem daunting at first, financial forecasting can give you an empowering perspective on any proposed project.
Crunching numbers to understand if and how you can afford a venture, and whether or not it’s profitable, will give you the knowledge and power you need to carry the investment forward.
If you have the time, plan for the best, worst, and normal case scenarios.
Do you want to know how it works first? Contact us with any questions or concerns you have.
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