Financial forecasts

Financial forecasts are assumptions and estimates about future financial conditions. They may be based on historical data, market analysis, macroeconomic analysis and other assumptions. Unlike a budget, which is a target the business steers by, a forecast is a continuously updated assessment of what is most likely actually going to happen.

Main types of financial forecast

• Profit forecasts: Estimate future net profit based on expected sales revenue and costs.
• Cash flow forecasts: Assess future liquidity, that is, whether the business has enough cash to meet its obligations as they fall due.
• Balance sheet forecasts: Estimate future assets, equity, liabilities and working capital at a given point in time.
• Key figure forecasts: Estimate future key figures such as ROI, ROA and ROE, and are used to assess profitability and return.
• Market forecasts: Estimate movements in share prices and market indices.
• Economic forecasts: Estimate macroeconomic conditions such as GDP growth, interest rates and inflation, which in turn affect the business's own forecasts.

What can financial forecasts be used for?

They are used to estimate cash flow, revenue, costs and other financial conditions for a given period. These estimates help with assessing profitability, liquidity and the effect of improvement initiatives.

Example: If a business has had revenue growth of 10% over the last few years, a simple profit forecast for next year can take the same growth rate as its starting point. If the business has a turnover of NOK 8,000,000 this year, that gives a forecast of 8,000,000 x 1.10 = NOK 8,800,000 in revenue next year, before any adjustment for known changes in the market.

How are financial forecasts prepared?

The methods include top-down forecasting, which starts with an overall market estimate and breaks it down to the company, and bottom-up forecasting, which builds the forecast from detailed figures for each department or product line and adds them together. In addition, time series analysis, scenario analysis, Monte Carlo simulations and economic models are used. Each method has its own best practice for implementation, and many businesses combine several methods in order to arrive at a more robust estimate.

Read more about how Capassa produces financial forecasts automatically.