4 Key Methods of Financial Forecasting Explained

Financial forecasting is an estimate of the projected income and expenses of a business which typically contains macroeconomic factors and conditions such as interest rates and national productivity that are specific to your business. Forecasts may include short-term and long-term projections of conditions that may impact revenue or plans for changes in expenses. Methods of financial forecasting include straight-line, moving averages, simple linear regression, and multiple linear regression. 

Four Key Methods of Financial Forecasting Explained 

Multiple methods of financial forecasting allow for different results ranging from forecasts that consider multiple variables to forecasts that include fewer variables, but allow a simpler, quicker answer. The first step in determining which financial forecasting method is best for your business, you should first understand the difference methods individually:

Straight-Line Financial Forecasting Method

The straight-line method of forecasting is the simplest method of financial forecasting. Straight-line forecasting involves the least amount of variables which allows a straightforward forecast, but does not provide the most accurate or detailed forecast. The straight-line forecast method relies on a financial analyst to use historical data and trends to predict future revenue growth. 

Moving Averages Financial Forecasting Method

Moving averages method of financial forecasting is used to measure the average performance of a metric over the course a of a shorter time period such as 3 or 5 months. This method is typically used in situations where the values change frequently such as stock values or inventory levels. Moving averages helps your business identify underlying patterns which you can use to evaluate common financial methods like revenues, profits, and sales growth. 

Simple Linear Regression Financial Forecasting Method

Using the simple linear regression method of financial forecasting analyzes the relationship between variables to create an accurate, detailed prediction. This method of financial forecasting primarily focuses on two variables and the changes between them and the trends they indicate. For example, the relationship between running ads on a specific platform and change in revenue.

Multiple Linear Regression Financial Forecasting Method

Multiple linear regression method of financial forecasting is used when your business needs to analyze multiple independent variables that are necessary for a projection. You will still be analytzing the relationship between them as you would in a simple linear regression, but there are more to consider. For example, a multiple linear regression might include promotion cost, advertising cost, and revenue. 

What Method of Financial Forecasting Should I Utilize to Make Decisions in My Business?

The method of financial forecasting that you use for your business will vary depending on a few different factors, specifically the purpose or goal of your forecast. Factors to consider include, but are not limited to:

• The available historical data or time-frame to acquire specific historical data.
• The purpose or context of the desired financial forecast. 
• The time-frame of when the financial forecast needs to be applied or finalized.
• The resources your business has access to complete the financial forecast.

If your business is ready to develop a financial forecast to establish a secure financial position and plan for the upcoming quarter, connect with ModVenturesLLC today.