Financial forecasting is a part of financial planning and also a part of a DCF valuation. But usually financial planning covers only a period of year or two while financial forecasting regularly covers about five years of the future.
Also financial planning is more detailed and usually includes all main financial statements when financial forecasting may include only main financial indicators as sales, gross income, operating income, net income and similar including main ratios from balance sheet.
The goal of financial forecasting usually is to make some future predictions that would help to describe potential value of a business or a project. Financial forecasting is a necessary tool for every large investment before making any decision.
Financial forecasting has few steps:
- Analysis of current financial situations of the company.
- Analysis of economical environment and business sector (market research).
- Competitors’ analysis.
- Plan for needed investments.
- Company’s market share and revenue forecasts.
- Forecasts of company’s expenses.
- Need for working capital estimation.
- Forecasts of other needed financial indicators.