Many businesses use forecasting to project future revenues, expenses or profits, and this is usually accomplished by using monthly, quarterly or annual data. Which one you use depends on whether you are trying to make an internal budget to map your company's progress or a projection of growth to make a pitch to investors. Whatever the case, forecasting is a useful tool used to set expectations and gauge your company's performance.
Monthly forecasting is used to make sure revenues are sufficient to cover monthly expenses or to decide whether adjustments are needed to respond to projected revenue growth or contraction. Monthly forecasting can be used to consider potential effects of holidays or seasonal events that might cause revenue or sales to spike or dip. Monthly forecasting can also help with part-time employee scheduling adjustments, the ordering of supplies and equipment purchasing decisions. Monthly forecasting is much like a map or outline that can keep the company heading in the right direction.
Quarterly forecasting allows you to compare the current year's performance to that of the previous year. Quarters throughout a year can vary, showing seasonal fluctuations or changes in ordering activity, but forecasting data and comparing it to the previous year can provide a more accurate determination of progress. Quarterly forecasting provides owners, managers and investors an idea of how the current year is shaping up. These forecasts -- which are much like checkups or financial snapshots -- are typically made public or shared with anyone who has a stake in the company.
Annual forecasting provides growth projections for lenders and investors, and it's useful for measuring responses to a business plan, economic forces or government policy. Annual forecasting allows for estimations that are based on changes that accompany a growth strategy, sales or marketing plan or major adjustments to the company's budget. Other factors that often apply to annual forecasting are changes in raw materials or commodity costs, health-care expenses, competition, energy costs, expansions and new product offerings.
When applying for a loan or attracting investors, three years of intense forecasting are often the minimum that most financial institutions require. The goal of longer-term forecasting is to give lenders or investors a better idea of when your company might achieve profitability or return on investment. Many investors and banks might want to see five years of forecasting to make sure you have a well-developed plan for your company's future requirements and expectations. This makes it easier to envision when your company will turn a profit and whether or not you have effectively planned for your company's growth.