Preparing financial forecasts is very significant for a business to build future plans and to operate in an effective manner, using the scarce resources present. With the help of Microsoft Excel, the forecasting process may be very simplified by offering the facility of analyzing the historical data and future projection of financial results in advance. The following section will explain how a simple financial forecast can be done in Excel.
What Are Financial Forecasts?
A financial forecast is an estimate of what future financial performance would be like based on past performances and various assumptions regarding future conditions. Key components of a financial forecast include:
1. Sales Forecast: Predicts the expected sales based on the performances in the past and existing market conditions.
2. Expense Forecast: This represents the estimation of the projected expenses to anticipate costs.
3. Cash Flow Forecast: Projects the flow of cash in and out of business.
4. Profit Forecast: Combines sales and expense forecasts to estimate the general profit.
Here is the systematic process of creating financial forecasts with the help of excel.
Step 1: Gather Your Data
To begin preparing your financial forecast, you’ll need to gather some data. This includes:
Historical Sales Data: Examine past sales records for patterns and seasonality.
Expense History: Gather data about fixed and variable costs over time.
Market Research: External influences include industry trends and the economy.
Step 2: Set Up Your Excel Spreadsheet
1. Launch Excel: Begin with a blank workbook.
2. Develop Headers: In the first row, you will have the headers for your columns. The standard headers are as follows:
A. Month/Year
B. Historical Sales
C. Projected Sales
D. Historical Expenses
E. Projected Expenses
F. Projected Profit
Step 3: Analyzing Historical Data
Enter Historical Values: Enter columns B and D with your historical sales and expense values.
Knowing your past history is essential to great forecast. You can figure this out:
– Average Growth Rate: This will indicate how much future sales would be expected to rise. The formula is thus as follows:
text {Average Growth Rate} = frac {text {Current Year Sales}- text {Previous Year Sales}} {text {Previous Year Sales}} times100
Project Future Sales
1. Choose Growth Rate: From the historical analysis, you will determine a growth rate for future sales. This would be a percentage increase found from your historical average.
2. Apply the Growth Rate: In cell C2, under Projected Sales use the formula:
=B2 × (1 + Growth Rate)
3. Drag Down the Formula: Click on the bottom right corner of cell C2 and drag down to populate the projections for the coming months.
Step 4: Project Future Expenses
1. Identify Fixed and Variable Costs: Identify what is fixed and what is variable based on sales.
2. Estimate Future Expenses: You can use similar formulas for expenses. In cell E2, type:
=D2 times (1 + text {Growth Rate})
3. Pull Down: Extend the equation to include all the time series you are forecasting.
Step 5: Calculate Anticipated Profit
Your anticipated profit is what you would get if you subtract your anticipated expenses from your anticipated revenues. In cell F2, you would use:
= C2 – E2
Pull this down to fill in the profit estimates for each month.
Step 6: Plot Your Data
Plots may also help you to learn more about your projections:
1. Charts Make Sales and Expense Data POP Go to the “Insert” tab, select any of the charts offered, say, a line chart or a bar chart by clicking it. This represents a trend.
2. Insert Trendlines A trendline also serves to bring out trends. In Charts, click on the Layout and Formulas tab
7. Review and Make Changes to Your Forecast
After completing your forecasts, critically review them. Consider factors that might affect your forecasts, including economic changes, market conditions, or industry trends. Based on your considerations, adjust your assumptions and figures to refine your forecast.
Conclusion
By simply analyzing data and using one’s strategic thinking, this can be easily done on a spreadsheet with the help of Excel. Data gathering, historical analysis of trends, projecting future sales and expenses, and putting together the results in graphic format will help you achieve the goal of a robust financial forecast. This tool can thus aid in planning but ultimately equip you to make business decisions for the future based on facts. Happy forecasting!