Financial forecasting involves estimating future financial outcomes for a company based on past performance and external factors. It allows businesses to anticipate problems, set targets, and demonstrate profitability to lenders. In SimVenture, students forecast by copying previous month's values, changing sales figures based on assumptions, and altering costs based on potential influences over the next 12 months. Forecasting helps businesses set sales goals to achieve profits, consider where to cut costs, and assess the impact of changes on profitability.

1. How financial forecasting
works in SimVenture and
why you should do it
SALOME MILDIANI
RAFAEL MACE

2. What is financial forecasting?
A financial forecast is an estimate of future financial outcomes for a company or
country. Using historical internal accounting and sales data, in addition to external
market and economic indicators, a financial forecast is an economist's best guess of
what will happen to a company in financial terms over a given time period—which is
usually 12 months.
Its main purpose is to evaluate past and current financial conditions and based on
that identify future revenue and expenditure goals.
Forecasting/planning/modeling are different terms, although some do not
differentiate them.

3. How to do a financial forecast?
Includes several steps:
1. Market research- gathering potential sales and competitive data for the entire
industry as well as for the individual company.
2. Past sales experience- reviewing sales for the past 3 months on a product-by-
product basis to look for trends.
3. Potential pricing- deciding whether pricing should go up, down or stay the same.
4. General economic conditions- how future economic conditions may influence
sales.
5. Taking an educated guess about company’s revenues for the next 12 months
based on last 3 month’s income statement.

4. How to do a financial forecast on
SimVenture?
Student has to:
 Click on “Copy previous months’ values to forecast”. As a result, the figures from last
month will be replicated to give a profit forecast for the coming months and each
figure will be altered to reflect the expected costs.
Change figures by clicking on the first blue figure (in the white background) in the
sales row.
Taking into consideration attained results student can make assumptions about how
different factors (e.g. changing price of product, changing to a cheaper supplier or
changing production strategy) might influence financial forecast for the next 12
months.

5. Why to do a financial forecast?
It allows business owners to assess how much income will need to be generated to
achieve a certain amount of profit.
Many business decisions are made based on forecasts. Need to plan for an uncertain
future
Allows to predict future activity in order to anticipate problems before they occur.
Allows to measure the actual financial operation of the business and make
adjustments where necessary.

6. Why to do a financial forecast?
A profit & loss forecast allows to:
Set sales targets which will produce enough income and profit
Consider where costs might be cut in order to create more profit
Consider the effect of changes such as new staff, training programmes or
marketing promotions on profit
Demonstrate to potential lenders the profitability of the company

7. MCQ
1) Doing a financial forecast in SimVenture includes:
A) Calculating the firm’s sales from past months.
B) Replicate the performances from past months.
C) Calculating the firm’s costs from past months.
D) All of the above.
2) What does a financial forecast take into account?
A) A firm’s past performances.
B) A firm’s fixed costs.
C) A firm’s variable costs.
D) All of the above.
3) A financial forecast can help a firm by:
A) Deterring new entrants in an industry.
B) Showing which costs can be cut off in order to create more
profit.
C) Reducing the risk the firm is taking.
D) All of the above.

8. Bibliography:
Epstein, L. (2012). The business owner's guide to reading and understanding financial statements. Hoboken,
NJ: Wiley. 93-105
Gov.uk, (2014). Forecast your business finances - GOV.UK. [online] Available at: https://www.gov.uk/forecast-
business-finances [Accessed 9 Feb. 2016].
simventure.co.uk, (n.d.). SimVenture course: Focused Activity - Profit Forecasting. [online] Available at:
http://simventure.co.uk/lz/resources/focusedactivities/pdf/Profit%20Forecasting%20V4.pdf [Accessed 9
Feb. 2016].