Fatihah Ramzi, DigitalCFO Asia | 24 November 2022
With the help of trend predictions, businesses can save money by not investing in products that might not appeal to their target market and instead focus on developing goods and services that fulfill the needs and objectives of their consumers.
Business executives that embrace and uphold best practices for financial forecasting or trend prediction are better equipped to expand their businesses and handle unforeseen setbacks. Despite the fact that it is difficult to accurately forecast the future, as the COVID-19 pandemic has shown, the organization has a better chance of adapting if it can properly hedge against the worst-case situations.
The truth is that businesses don’t become well-capitalized, with solid balance sheets and positive cash flows by accident. Rationally analyzing data, being intimately connected with the business, and having the most recent customer and market insights are all essential to financial health. In prosperous times, finance teams that perform accurate forecasts benefit from the company’s success. According to data analytics, business executives are aware of how their finance teams’ careful planning helped them survive a very trying time.
By analyzing the past and the present, forecasting is the process of predicting what will happen in the future. Based on anticipated demand for products or services, it serves as a planning tool that enables organizations to respond to unpredictability.
A solid financial forecast or trend prediction includes both macroeconomic considerations and circumstances unique to the organization. Trend prediction is a financial plan that estimates the likelihood of certain disruptions occurring that could affect future income and expenses of a corporation. A comprehensive projection includes, but is not limited to, short- and long-term outlooks on variables that may have an impact on revenues and backup plans for expenses not now considered required.
Organizations that provide accurate financial trend predictions rely on model-building professionals, either employees or consultants, and combine their work with input from individuals who have a thorough grasp of the organization, the sectors it serves, and the communities it works in. Similarly, data collection and software are crucial to the financial forecasting process.
Importance Of Predicting Trends
Trend predictions are crucial for corporate planning, budgeting, operations, and funding; they merely assist executives and external stakeholders in making wiser decisions. A financial projection is an estimation of how much money a firm will make in the future, and it’s an essential step in creating the annual budget. It guides important financial choices like whether to fund a capital project, add employees, or attract investors. Business balance sheets and other disclosures provide significant information from their predictions.
Trend predictions give firms access to unified reports, enabling finance departments to set realistic and doable company goals. Additionally, it offers management important information about past and projected performance of the company. Financial predictions are crucial in investor relations and loan applications, in addition to guiding internal fiscal controls and choices. Predictions are taken into account in the decision-making processes of banks and other funders. Startups are also not exempt. As described, financial projections are a crucial component of any new business plan.
Benefits of Trend Prediction
Along with the previously mentioned practical advantages, creating a financial forecast compels finance teams and line-of-business associates to pause and consider the worth of rolling predictions.
CFOs must decide whether to employ a rolling model or project out a certain number of months. Will the projection be incremental, expanding on last year’s, or will the company start with a clean slate? Which potential new product lines need to be included in a formal prediction since facts supporting their viability exist?
With trend prediction, CFOs can confidently approve a new capital project based on data, make wise judgments even when under time pressure, and have better success securing finance or attracting investors.
Types of Trend Analysis
Numerical data are used to compute trend analysis. It usually consists of historical data, either conventional data (such as a company’s success as reported in its publicly available financial records) or alternative data (such as the number of job openings made by a rival in the previous five years). You may spot three different types of trends when you add numerical data to a chart.
The company’s data points are growing, which is what an upward trend signifies. This could indicate different things depending on what kind of variable you’re looking at and what you’re trying to accomplish. For instance, if you are a business owner and are looking at the cost of the raw materials needed to make loaves, you see that the cost is rising. You may predict several outcomes using this knowledge, such as rising costs for your company or the requirement to increase ultimate consumer pricing.
At the same time, if a shareholder observes an upward tendency in the share price of a business, it could influence them to buy the company’s stock. An increase in a stock’s price typically denotes a positive situation, assisting you in deciding whether the investment would be wise.
On the other hand, a downward trend shows that the value of your variable is declining. For instance, if a company’s earnings fall sharply, investors may need to exercise caution since the stock is hazardous because the price is falling. This is true if other economic or financial variables are trending downward. When researching financial assets, investors might perform trend analysis on the asset’s historical data. If the price is falling, a bearish market is present. In other words, investing is not advised in this situation because it could result in a loss if prices continue to fall.
Finally, stagnation is indicated by the horizontal line. In other words, neither the prices nor any other measures are increasing nor decreasing; instead, they are remaining unchanged. In reality, a flat trend may rise for a time before pulling a trend reversal, attaining an overall steady general direction. It’s dangerous to base investment decisions on horizontal trends because you never know what will happen. If you do decide to go ahead with it, you must undertake a detailed income and expense analysis regarding the sales regions to determine the dangers.
With the help of trend predictions, businesses can save money by not investing in products that might not appeal to their target market and instead focus on developing goods and services that fulfill the needs and objectives of their consumers. By taking into consideration market demands, product popularity and improving their chances of producing something that their consumers will like, this can help organizations save time and money. This enables companies to capitalize on consumer preferences by spotting market possibilities as they materialize.