Financial forecasting is one of the key business processes used in predicting the performance of a business or any business unit based on available data, which has happened before, and a few assumptions that may affect performance in the future. Using Excel is an efficient way to have most of the functions work in the best and most efficient ways possible, so forecasting will be easier. A few of the key tips and tricks for effectively using Excel in financial forecasting are included below.
Then begin making projections with your historical data in Excel. How you do this is first by ordering it by column time periods like months, quarters, or years. Then insert the appropriate financial metrics such as revenues, costs, and net income in successive columns.
The Microsoft developers have included numerous functions in Excel that might be helpful in automatically constructing most of the work one does in preparing a forecast. Two are particularly efficient: **FORECAST.LINEAR** and **FORECAST.ETS**
a) **FORECAST.LINEAR**
This function performs the calculation of future values using past data points when there’s a linear relationship. Employ it when there is clearly a defined and consistent trend.
The **FORECAST.ETS** function actually falls under what Excel would class as more advanced capabilities to forecast. This is in the sense that it has the ability to find trends and seasons, and even some historical relations, so one can make the most precise forecasts.
Amongst perhaps some of the most basic as well as useful uses for the denoising of datasets and the extraction of time series trends, moving averages are included. A basic moving average computes the mean of points in the data set taken over an interval, or period-for instance 3 months, or 12 months, etc.
– Formula: `=AVERAGE(range)
– **Use Case:** Take a 3-month moving average of sales or revenue to filter out noise caused by short-term activity and look at the bigger trend.
**TIP:** If you want to be even more reactive in your trend line, take an Exponential Moving Average, that will give more influence to recent data. A simple moving average can be calculated with the =AVERAGE function or more specific formulas devised for EMA.
But it should also be known that financial projections are also based on several assumptions prone to change. Scenario planning therefore allows formulating what otherwise would have remained unknown prospects based on various sets of inputs; like sales growth rates, cost and interest rates.
a) Data Tables, Excel, data table, will allow one to analyze the sensitivity in which changes in a given factors affect output produced from making financial projections. For example: what would an increase in growth rates do to revenue in future years.
TIP: Use a one-variable or two-variable data table to help you quickly try different scenarios. Create a table with one column containing the variable you want to change-for example, the growth rate of sales-and then have other columns calculate the corresponding forecast outcome.
b) Use Scenario Manager Create multiple “what-if” scenarios, as well as best-case, worst-case, and base-case forecasts.
Tip: You can go there by clicking on `Data > What-If Analysis > Scenario Manager`. Here you can create many assumptions for your forecasts and switch in between them in the wink of an eye.
If you have made column or line chart click right mouse button over the data series and Add trendline. Depending on your type of data you likely will choose one of those, for example linear or exponential, or polynomial type.
Apply in a cell Sparklines small charts that allow showing the data in time to have an at-a-glance view of your forecast:
Excel Add-ons for More Advanced Forecasting
Use something a bit more serious for forecasting if you don’t mind buying the add-on to Microsoft Excel, like the Solver which solves optimization problems, or **XLSTAT** that will give you more advanced means of statistical forecasting.
TIP-Solver can help optimize budget allocation in a forecast, for instance, in order to allocate the greatest amount of budget to the projects that are projected to generate the most revenue. Make Updates Automatic for Forecasts with Dynamic Formulas
Keep your projections updated through automatic updating by dynamic formulas. For instance, apply **OFFSET** and **COUNTA** to create dynamic ranges that depend on the number of data points.
Another very vital point in terms of lucidity about financial projection is that the assumptions in the model should be clear as the daylight. Be transparent to the extent that assumptions are going on-the growth rates, inflation assumption and so on-so that it could be easy for understanding the basis those predictions were computed.
Master the above tips and tricks so as to make you a power user, able to help you in building accurate, dynamic, and insightful financial forecasts in Excel.