Top 7 Types of Financial Forecasting Models

In this article we discuss:

• What Is Financial Forecasting?
• Types of Financial Forecasting
• Quantitative vs. Qualitative Forecasting
• 7 Common Financial Forecasting Models
• How to Choose the Right Forecasting Model
• Tips for Building More Accurate Forecasts

Across industries, market conditions are always shifting. Interest rates change, customer preferences evolve, new technologies emerge, and global events ripple through supply chains and impact the cost of goods. While no company can totally predict disruption or control external factors, forecasting gives them a way to stay prepared.

Today finance leaders have access to better data, more sophisticated tools, and greater insight than ever. Capabilities like artificial intelligence (AI), automation, and predictive analytics enable smarter forecasting that can evaluate many scenarios and inform strategic plans for each.

Gartner estimates that 90% of finance teams will have deployed at least one AI solution by next year, meaning that fast, accurate, data-driven forecasting is also becoming a competitive imperative.

But no matter how effective the tools in your arsenal are, smart forecasting starts with knowing and applying the right financial forecasting models for each situation. In this guide, we'll explore different types of models, when they work best, and how to select models that fit your business and goals for the future.

What Is Financial Forecasting?

Financial forecasting uses historical data, business trends, and external indicators to project a company’s future financial outcomes. It can help estimate everything from revenue and expenses to profitability and cash flow.

It's different from business forecasting, which takes a broader view in looking at operational metrics, market trends, and sales planning. Financial forecasting stays focused on predicting a company’s financial performance.

Forecasting is a core part of financial planning because it enables greater efficiency in the following ways:

• Revenue and expense projections: Improve accuracy by grounding forecasts in historical and real-time data

• Cash-flow visibility: Anticipate potential shortfalls before they become operational challenges

• Impact analysis: Understand how new initiatives or investments will affect financial performance

• Budget alignment: Support confident, data-driven budgeting across teams

• Leadership clarity: Help decision-makers stay aligned with financial realities and strategic goals

With more data at their fingertips and less time to make critical decisions, finance teams are increasingly adopting AI-powered forecasting tools to gain a competitive edge. AI helps businesses update projections on the fly, model different scenarios instantly, and surface insights that would be impossible to catch manually.

Workday research found CFOs are overwhelmingly seeing the direct AI impact on forecasting value, naming better forecasts, strategic planning support, and improved scenario planning as the top transformational areas from adopting AI in finance.

Types of Financial Forecasting

Different types of financial forecasts serve different business needs. A company preparing for year-end planning will likely rely on different projections than one planning a product launch or navigating a liquidity crunch.

That’s why it’s important to understand the major forecasting categories and the role each plays in strategic planning. These are four of the most common types of financial forecasting.

• Revenue forecasting estimates expected income over a defined period, using historical sales data, pipeline activity, and market trends.

• Expense forecasting projects operating costs such as salaries, utilities, and marketing spend, helping teams identify where costs may increase or need to be controlled.

• Cash flow forecasting predicts the timing of cash inflows and outflows, which is essential for managing liquidity and avoiding shortfalls.

• Balance sheet forecasting provides a forward-looking view of assets, liabilities, and equity, often used for long-term financial health assessments or investor reporting on a company’s project financial position.

Short-term forecasting (weeks to quarters ahead) is typically used for cash flow planning, monthly budgets, or quick scenario modeling. Long-term forecasting (one year or more) supports broader strategic business planning, such as capital investments, headcount planning, or entering new markets.

The best-run finance teams know how to balance both, using short-term insights to stay agile and long-term forecasts to stay aligned with growth goals.

Quantitative vs. Qualitative Forecasting Methods

Financial forecasting methods generally fall into two categories: quantitative and qualitative. Quantitative forecasting relies on numerical data and statistics to project future outcomes. It's based on historical data and best suited for situations where past performance is a reliable indicator of future trends.

Qualitative forecasting, on the other hand, is based on human judgment, expert insights, and market research. It's ideal for scenarios where data is limited or rapid change makes historical patterns less useful.

Quantitative methods include:

• Regression analysis: Uses historical relationships between variables to predict future outcomes.

• Moving averages: Smooths out short-term fluctuations to highlight longer-term trends.

• Time series analysis: Projects future values based on patterns like seasonality or growth observed over time.

Qualitative methods include:

• Delphi method: Gathers insights through rounds of expert consensus.

• Expert opinions: Leverages internal or external specialists to shape forecasts.

• Market research: Combines surveys, interviews, or field data to estimate future performance.

In practice, most organizations use a blend of both approaches. Quantitative methods provide the backbone of most financial models, while qualitative inputs help contextualize the data, especially during times of disruption or change.

For example, a company launching a new product in a volatile market might begin by using historical sales and marketing data from similar product lines to run a quantitative time series or regression model. 

This would provide a baseline forecast based on measurable trends. But because the product is entering an emerging category with shifting consumer preferences, the finance team would also consult market analysts, gather insights from sales leaders, and incorporate findings from recent customer surveys to layer qualitative context.

The result would be a forecast that balances data-driven precision with informed judgment, and gives the business a more realistic picture of what to expect.

7 Common Financial Forecasting Models (and When to Use Them)

The right financial forecasting model depends on the question you’re trying to answer, the data you have available, and how quickly you need to act. Some models are best for spotting long-term trends, while others help evaluate short-term risks or specific drivers like pricing or staffing.

Below are seven widely used forecasting models, each with distinct use cases, benefits, and tradeoffs.

1. Straight-Line Forecasting

Straight-line forecasting assumes that future performance will continue at the same rate of growth seen in the past. It extends historical data into the future by applying a constant rate of change, making it one of the most straightforward approaches to forecasting.

• When to use it: For budgeting in mature, steady-growth businesses

• Strengths: Easy to implement, clear outputs

• Limitations: Doesn’t account for seasonality or variable market conditions

To apply the straight-line method, a finance team would review historical revenue figures from the past few years and calculate the average annual growth rate—say, 5%. They’d then project next year’s revenue by increasing the current year’s revenue by that same percentage. It’s a quick way to build a baseline forecast when performance has been consistent.

2. Moving Average/Time Series

Time series forecasting uses historical data points to identify patterns and trends over time. A moving average model smooths out short-term fluctuations to reveal underlying trends or cycles, such as seasonal demand. While it’s most often used for predicting stock prices, it can also be used to forecast future revenue. 

• When to use it: For identifying seasonality or monthly/quarterly patterns

• Strengths: Helps detect trends and anomalies

• Limitations: Doesn’t factor in external variables

To use a moving average, a team would average their expenses over the past three months and use that figure as the forecast for the upcoming month. By repeating this financial forecasting process monthly, they can smooth out irregularities and better understand the overall trend, even if individual months are volatile.

3. Simple Linear Regression

Simple linear regression examines the relationship between two variables, typically an independent input (like marketing spend) and a dependent output (like revenue), to project future results. It’s useful when performance is clearly linked to a single driver.

• When to use it: When one clear input influences an output

• Strengths: Highlights cause-and-effect relationships

• Limitations: Only accounts for one variable; requires strong correlation

To use simple regression, a finance team would chart historical marketing spend alongside revenue to identify a correlation. If the data shows that every $1 in marketing typically leads to $5 in revenue, they can use that ratio to predict how a future increase or decrease in spend might impact top-line results.

4. Multiple Linear Regression

Multiple linear regression builds on the simple model by incorporating more than one independent variable. To be accurate, there must be a linear relationship between the independent and dependent variables.  Multiple linear regression helps businesses understand how multiple drivers interact and contribute to financial outcomes.

• When to use it: When performance depends on several drivers (e.g., headcount, pricing, sales activity)

• Strengths: More nuanced and accurate than single-variable models

• Limitations: Requires a large, clean dataset

In practice, a team might analyze how revenue varies across different sales territories, product types, and levels of marketing investment. By inputting all of these variables into a regression model, they can estimate the combined effect and build a more detailed and accurate sales forecast.

5. Scenario/What-If Analysis

Scenario planning, also known as what-if analysis, models different hypothetical outcomes based on varying assumptions. It enables teams to stress-test plans and prepare for best-, worst-, and most-likely-case situations.

• When to use it: For risk planning, strategic decisions, or major investments

• Strengths: Flexible, supports contingency planning

• Limitations: Quality depends on quality of assumptions

For example, a finance team might use scenario planning tools to create a baseline forecast, then adjust key variables, like lowering the expected conversion rate by 10%, to see how those changes affect overall revenue. This lets them prepare alternate plans depending on how reality unfolds.

6. Bottom-Up and Top-Down Forecasting

These two approaches differ in where the forecast begins. Bottom-up forecasting starts with detailed inputs from individual teams or departments. Top-down forecasting begins with broader business targets and allocates numbers down. Many companies blend the two.

• When to use it: For aligning departmental planning with executive strategy

• Strengths: Promotes internal alignment, can be blended for balance

• Limitations: Can produce conflicting results if not reconciled

For example, a sales team might gather detailed projections from each rep (bottom-up), then compare that total to a top-down target based on company-wide revenue goals and market share expectations. If there’s a gap, leaders can adjust targets or strategies to ensure both perspectives are aligned.

7. Driver-Based Forecasting

Driver-based forecasting links key financial metrics to operational drivers—things like pricing, headcount, or conversion rates. It focuses the forecast on the levers that leadership can actually influence.

• When to use it: For dynamic planning in fast-moving businesses

• Strengths: Makes assumptions explicit; easily updated as drivers change

• Limitations: Requires agreement on key drivers and frequent updating

To build a driver-based forecast, a team would identify key inputs that directly impact revenue, such as product price, units sold, and conversion rate. They’d plug those variables into a model so that when one driver changes, the forecast adjusts automatically, helping them see exactly where to focus.

How to Choose the Right Forecasting Model

The most effective financial forecasting model is the one that fits your business context. Your company’s size, maturity, industry dynamics, and planning goals will all influence which model makes the most sense. There’s no universal best option, only the best fit for your situation.

Key considerations when choosing a forecasting model include:

• Business size and stage: Startups may need flexible, driver-based models, while mature companies might rely on historical trends.

• Data availability and quality: Quantitative models require reliable historical data. If that's limited, qualitative or hybrid approaches may be better.

• Industry volatility: In fast-moving sectors, real-time or scenario-based models help account for uncertainty.

• Planning horizon: Short-term goals may call for time series forecasting; long-term planning may need regression or balance sheet models.

• Team capabilities and tools: The complexity of a model should match your team’s ability to maintain and interpret it.

Choosing a forecasting model is ultimately also about the decision-making culture of your business. Some organizations benefit from models that emphasize speed and flexibility, while others require rigorous, multi-variable analysis to support complex planning cycles.

What matters most is aligning your forecasting approach with how your teams operate and the kinds of questions leadership needs answered. In many cases, the right model isn’t the most advanced, but the one that gets used consistently and effectively.

Tips for Building More Accurate Forecasts

Even the most sophisticated forecasting model will fall short without the right process behind it, and it's one many companies struggle to get right. In fact, more than half of CFOs say their forecasts are worsening right now amidst faster change and growing market uncertainty.

Confident, accurate forecasts require certain best practices that include handling large datasets responsibly, driving cross-functional alignment, and committing to ongoing refinement. While no model can predict the future perfectly, you can get much closer with the right fundamentals in place.

• Use clean and consistent historical data: Reliable inputs are essential for producing reliable outputs.

• Update models regularly: Reflect new data, market shifts, or business assumptions.

• Blend forecasting methods: Combining different approaches can help balance precision with flexibility.

• Collaborate across teams: Bring in insights from finance, operations, sales, and other key stakeholders.

• Stress test your assumptions: Model different scenarios to understand how changes impact the forecast.

When forecasting becomes a shared, iterative discipline—not just a finance exercise—it becomes far more powerful. Organizations that prioritize process and collaboration consistently produce more meaningful, actionable forecasts.

Putting It All Together

Confident financial forecasting builds confidence in the decisions that shape your business. Choosing the right model means understanding your data, your goals, and your operating environment. It’s not one-size-fits-all, and the most effective teams know how to adapt their approach as circumstances evolve.

As markets shift and strategies need to adjust, treating forecasting as a dynamic and ongoing process helps organizations stay aligned, make better use of their resources, and identify strong growth opportunities.

The more integrated forecasting becomes across teams and planning cycles, the more valuable it becomes. As data and tools improve, the opportunity isn’t just to forecast the future, but to shape it for your business.

Increasingly, CFOs are required to be strategic figureheads for their organizations. Learn how the FAME framework can help you achieve your business goals, with case studies from two enterprise-level organizations.