Quantitative Financial Forecasting Methods: The 3 Types

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Forecasting serves an essential purpose in any business aiming to make profits. It allows you to plan for your company’s future and determine how changes will affect your bottom line. There exist quantitative and qualitative forecasting methods for businesses.

Accounting services for small businesses mainly use quantitative techniques in forecasting. These methods depend on historical data to predict your business’s future growth and outcomes.

Here are the different types of quantitative financial forecasting techniques used in business settings:

Time-Series Forecasting

In this technique, data is collected over a given period and used to identify the financial trends. Examples of time-series forecasting methods include the rule of thumb, smoothing, and decomposition. Rule of thumb simply copies historical data without any alterations while smoothing uses average results; therefore, evening out all irregularities in your historical data. Decomposition breaks it down into cyclical, trend, irregular, and seasonal components and forecasts each component separately.

Causal Methods

These forecasting techniques presume that the items being forecasted have a cause and effect connection with other variables. The variables might include interest rates, customer confidence levels, disposable incomes, and levels of unemployment. For forecasts on variables with interest, this method uses data from the time-series method. The common causal forecasting method used is regression analysis.

Proforma Financial Statements

These statements use costs and sale figures from the preceding years after excluding specific one-time costs. Proforma financial statements are typically used in acquisitions and mergers. They are also used when requesting capital from investors when forming a new company.

While these quantitative financial forecasting techniques might appear simple, they are complicated when handled manually. They take up significant time and are prone to gross financial errors, which might cost your company big. Getting forecasting software to manage your job is the best way to ensure the accuracy of your forecasts.