Financial forecasting models assist in predicting the future of your business and its finances. You can choose from several models based on the information you have hands-on and the results you are expecting.
Knowing how different models work and how to use them is necessary to predict future events and plan ahead. Today, we will discuss five top-notch financial forecasting models and their use cases to figure out which one is most suitable for your business.
Before you head toward exploring these models, you need to know the difference between financial forecasting and modeling.
Difference Between Financial Forecasting and Modeling
These terms are often confused as they use the same data and proceed through the same process. They are correlated but different from each other.
Financial Forecasting
It is usually done by the chief financial officer or controller. First of all, they take all the considerations, interior and exterior data, revenue growth, and trends to forecast future events. Based on this data the future of your business is predicted and then you can make informed decisions. It’s just like weather forecasting. The difference is that you have to predict the market trends and finances of your business instead of the weather conditions.
Significance
Before you make any big decision for your SaaS company, you need to have some idea about future events. It helps you find new opportunities and plan to deal with upcoming problems ahead.
Let’s say you observe the market downturn ahead, you will try to cut short your expenses. And if you see the market will rise in the upcoming days,
Financial Modeling
Financial modeling is important for companies because they want to have ideas about future events to make strategic decisions accordingly. It helps you get numerous benefits from your bottom line. Financial modeling enables you to get accurate and recombinant information for future use.
Significance
The main reason behind its importance is uncertainty. You can not predict the exact events. Therefore, you can only make uncertain assumptions. Therefore, you need to opt for numerous forecasting models to get ready for future events. It allows you to work with uncertainties about the future of your business.
Navigating Profitable Horizons: Unveiling 5 Financial Forecasting Models for SaaS Companies
Based on the information you have, the results you are expecting, and what you are trying to predict. The following are the top 5 financial forecasting models that are ranked best by SaaS business experts.
Top-Down Financial Forecasting Models
It is useful when you want to avail some new opportunities. It is suitable when you don’t have any historical data in hand.
The size of a new market will make the basis for the top-down financial model and then predict how many market shares you will be able to put your hands on.
Use Case
Let’s say you are planning to build a new SaaS company but don’t know how much the market will grow. Start looking at the total addressable market to check its worth in total.
Then look at market shares, if a big company is holding most of them, it will be difficult for you to grab shares. On the other hand, if the shares are split among several small players, then you can conveniently build your shares.
Now you have to multiply the predicted amount of shares you will raise with TAM. The answer will be the future revenue. If it’s higher than the expected costs of launching the product and acquiring customers, then you are good to go.
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Bottom-up Financial Forecasting Models
It is applicable when you have access to some useful historical data. Based on this data, you can proceed with calculations and predict the future.
It is considered more accurate and functional as you have some actual numbers to work with. The assumptions are reduced by using the bottom-up model.
Use Case
You have 200 customers at the moment and generate $25/month from each customer. You see you are losing 5 customers every month and getting 10 new ones at the same time. Based on this data, you predict that MrR will be 200×25 = $5,000. And per month the rise in it will be 25× 5 = $125 as you are getting 10 new customers and losing 5 at the same time.
Delphi Forecasting Models
The Delphi financial forecasting model is one of the most effective ones as you are getting help from experts. A group of experts will forecast the future of your business. It is based on leveraging facilitators and continuously collaboratively repeating hypotheses and analysis.
Numerous surveys and focus groups make the basis of this model. Every round in this survey is built on the previous iteration. This method ensures all groups have access to information.
Use Case
Imagine your current MRR is $10,000. You introduced some new features to make your customers pay more and generate bigger revenues. However, your customers are not interested in paying more and you are struggling to get new users.
You hired experts to conduct a series of focus groups with your current subscribers or users.
After each round of focus groups, experts will present their findings. Then they will work on the next focus group with new suggestions and recommendations. The same process will be repeated several times until the issue is solved.
Correlation-Based Forecasting Models
The correlation-based model will help in forecasting the future of business by identifying and correlating numerous variables. Relations between price and cost, supply and demand, and other factors that affect each other make the base of this forecast.
Use Case
Imagine you are planning to start a new marketing campaign, understanding your buyers, the time when they behave as customers, and other factors that can help in making your campaign more effective will be helpful.
If you observe that most of your customers love sharing funny stuff, especially memes, then you will tend to make advertisements funny so that people share them with others. It ensures the online presence of your product and attracts more customers as well.
Statistical Forecasting Models
It is often called quantitative modeling as well. It is based on creating links among findings of other disciplines. It helps in comparing or benchmarking your business with other businesses.
Use Case
Your growth rate is currently exponential, you know this is not going to remain the same. However, you need to find out when the growth rate may face a decline to plan accordingly.
You can use data from two resources. Firstly, you need to gather information about trends of the previous 20 years. Then take experts’ suggestions about market trends in the upcoming 10 years.
Secondly, you will gather public data to check how your competitors are growing in that period and when will their growth curve level off. Then you will take statistical models to assess how long you will enjoy exponential growth.
Flightpath by Baremetrics: Better Forecasts
Companies don’t have good information about future events. Therefore they use financial forecasting models to predict future events.
Creating the maximum amount of useful data is the first step of this forecasting. You can find it internally in balance sheets or externally in the news.
Then you have to track uncertainties and methods to eliminate them. Finally, you have to select the right model. The model that can work well with the available data is best for you.
Does the whole process appear challenging? Get help from Flightpath by Baremetrics to do this forecasting. Register now to enjoy its trial.
