Once you’ve collected the information you need to build your forecast, you can create pro forma statements. It’s also good if your company is brand new, and doesn’t have a lot of financial history to draw on for making projections Research-based forecasting is a good choice if you’re courting investors, or planning on rapid, aggressive growth. You may find you need to hire outside consultants and researchers to handle the heavy lifting. The drawback is that researched-based forecasting can be expensive. And it’s the kind of forecast that investors and lenders want to see. The benefit of research-based forecasting is that you get a detailed, nuanced view of how your business could grow, taking into account a lot of different factors. You might look at how companies similar to yours have planned their own growth. You may look at how your industry has performed over the past ten years, investigate new technologies and consumer trends, or try to measure the progress of your competitors. When you do research about broader market trends, you’re using research-based forecasting. Historical forecasting is a good bet if you’re forecasting for modest growth, or else creating a quick-and-dirty forecast for your own use-not putting together a presentation for potential investors. The drawback is that you’re only using info about your own business, and not looking at broader market trends-like what your competition has been up to. The benefit of this is that it’s relatively easy to do and doesn’t take a lot of time, money, or expertise. From there, you can make a guess about how fast you’ll grow this year. You’re looking at your last few annual Income Statements, Cash Flow Statements, and Balance Sheets to see how fast you’ve grown in the past. When you use your financial history to plot the future, it’s historical forecasting. Remember, the goal is to create a realistic, useful forecast-without breaking the bank or eating up all your time. The blend you choose will depend on your needs and the resources at your disposal. Step two: Decide how you’ll make your forecastĭepending what resources you choose to use, the type of forecast you create will fall between two poles- historical and researched-based.Īlmost every financial forecast includes a little bit of historical forecasting, and a little bit that’s research-based. If you’re presenting your forecast to a lender or investor, though, you should create pro forma statements covering the next one to three years. If you’re creating a financial forecast for your planning purposes, you should create pro forma statements covering six months to one year in the future. Helpful resource: How to Read and Analyze Financial Statementsĭepending on your goals, these statements will cover different time spans. There are three key pro forma statements you should be familiar with: The only difference is that you prepare pro forma statements in advance, for future months and years. Pro forma statements are just like the financial statements you use each month to see how your business is performing. Pro forma financial statements are how you make those predictions somewhat concrete. A financial forecast tries to predict what your business will look like (financially) in the future.
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