It pays to know what your financial future will look like. Most (if not all) startups tap into some form of financial forecasting. The question is, what forecasting technique will help you make the most informed business decisions?
Today, many startups rely on traditional forecasting – a method that manually examines historical performance. However, with the advancement of technology, artificial intelligence (AI) can dramatically improve forecast accuracy and efficiency.
In this article, discover the differences between traditional and AI financial forecasting and whether or not you should opt for an AI-based solution.
AI Forecasting Vs Traditional Forecasting
Financial forecasting lets you predict your startup's financial future. Traditional methods manually examine historical data such as expenses, sales, cash flow, and general financial performance. However, this approach can be tedious, time-consuming, and has a high chance of human error.
On the other hand, AI forecasting quickly gathers input from multiple data sources and implements machine-learning algorithms to ensure accurate forecasts.
According to a study by IBM, half of the companies that adopted AI financial forecasting methods experienced a 20% or more decrease in overall forecast error.
How Does Artificial Intelligence Improve Financial Forecasts?
Besides the accuracy and speed that AI provides, there are many other features intelligent forecasting offers startups.
Take a look at the core features below.
Processing Data From Multiple Sources
When you use traditional forecasting, you typically rely on separate sources of financial data to evaluate current performance and predict future trends. You need to decide which statistics and timelines to use and determine long-term projections.
Unlike traditional forecasting, however, AI utilizes data from multiple financial sources to build more comprehensive forecasts.
Besides your startup's historical data and conventional market information, AI forecasting relies on a variety of information, such as your bank and credit card transactions, cash flow data, and sales trends.
AI forecasting tools then analyze and aggregate this information simultaneously. These comprehensive AI-generated models help you build more reliable and accurate forecasting models.
This is especially useful when you lack statistics and figures, as more data doesn't just improve the accuracy of your forecasting — it also gives you insight into new areas that you may not have been measuring before.
Identifying Patterns and Correlations
As we mentioned above, AI can process and analyze large amounts of data at a higher pace and efficiency. As a result, if you’re using artificial intelligence to predict your outcomes, you’re more likely to identify patterns and correlations at a faster rate.
For instance, AI tools can show you the relationship between your revenue growth and marketing expenses. If you aren't seeing significant revenue growth when your marketing expenses increase, that may be a sign that you can allocate some of your marketing funds elsewhere.
When you can see these patterns in real time, you can adapt on a dime and make more impactful business decisions sooner rather than later.
Generating Real-Time, Accurate Predictions
Unlike traditional forecasting, AI forecasting lets you follow and analyze real-time predictions.
In other words, financial data insights are available whenever you need them.
With real-time predictions, you can quickly identify threats, prevent errors, and make important decisions to grow and improve your business.
How Inaccurate Forecasting Can Cripple Startup Businesses
Startup businesses need to present convincing financial results to stakeholders. It's important to demonstrate that your company's financial stability, revenue, assets, and profit align with stakeholders' expectations.
To do that, you need to define your business’s purpose and set realistic goals backed by data.
Accurate forecasting is the basis of every important business decision. It helps you to reach better financial outcomes, more stability, and thus, access to more investment.
Inaccurate predictions can paint a false picture of your company’s financial position or fail to identify risks and threats. This can lead to negative financial outcomes, investor mistrust, and even business failure.
The AI And Human Relationship
Nowadays, there are heated debates over the impact of AI on the human workforce. While many people feel skeptical about the capabilities of artificial intelligence, some workers fear being replaced.
There’s no denying that AI makes forecasting better for your startup.
However, AI-based solutions can't fully replace humans. AI lacks the emotional intelligence, creativity, and soft skills essential in everyday operations and decision-making.
Instead of replacing humans, AI will assist your employees in making faster and better decisions so they can focus on more meaningful work.
AI solutions will help you improve accounting accuracy and automatize rote, time-consuming tasks. As a result, you'll see higher profits, lower operational costs, and workforce optimization.
Plan Better With An AI-Based Forecasting Solution
Accurate forecasting is crucial for startups to make more informed business decisions, reach better financial outcomes, build trust among stakeholders, and gain more investment.
Artificial intelligence financial forecasting allows you to use adaptive machine-learning algorithms and real-time data from multiple sources. This helps you improve the accuracy of forecasts. Compared to traditional methods, opting for an AI-based forecasting solution can save you time, effort, and money.