There is no simple way to do financial forecasting. All forecasting contain the technically inaccessibility act of predicting the future. Nonetheless, forecasting is essential for equity valuation and internal budgeting. The best financial forecasts are educated quantitative guesses founded on a very nuanced understanding of a business, the external factors that influence business performance and forecasting techniques that typically lead to successful estimates. Assuming an analyst has intimate knowledge of a firm, its risks and catalysts, several straightforward techniques can be employed using Microsoft Excel.
Equity analysts frequently replicate financial statement data over time in an Excel spreadsheet to create a model. Each column can represent a distinct period and each row a different item on the balance sheet. This format allows analysts to observe trends over time, and other key performance metrics can easily be included to affect the model. Such a financial model facilitates fundamental analysis and makes it easy to assess growth, margins, free cash flow, working capital management and changes to balance sheet items. Different items can be represented graphically, and all of the financial statements can flow together in a working model.
Excel can also be used for strictly quantitative forecasting when the data is appropriate. A forecast function extrapolates future values along a best fit line from uni variate ordinary least squares regression. This basically takes the trend line from a two-variable scatter plot and extends it. Excel also has an exponential smoothing function in the Data Analysis button of the Data tab. Exponential smoothing eliminates irregularities in time series data to create tease-out of an overarching trend. This trend is simply projected into future periods.