Setting a realistic budget is essential for the productivity of a small business. But there’s a lot more to consider than keeping expenses under a specified dollar amount.
Business forecasting is a multifaceted approach to accounting. It’s used in predicting revenue, economic fluctuations and downfalls.
Forecasting also helps determine business needs, potential growth, and many other factors. The risks, misconceptions and learning curves are overwhelming, especially to new entrepreneurs.
We’re here to add simplicity to these complex processes. Continue reading for some excellent business forecasting tips and services. We’ll help you make the process a lot easier.
What Is Business Forecasting?
Because the economy shifts drastically, business forecasting is a necessary part of accounting. You may think it only affects large corporations, but small businesses will benefit.
Business forecasting is an estimate of a business’ upcoming sales and profits. It’s based on the state of the economy and consumers’ needs for their products or services.
Business people use these predictions to create short and long-term plans. For example, a forecast can show a dramatic increase in sales from one year to another. In these cases, a business owner will need to prepare themselves and their employees.
The changes can include:
- Increasing the store’s inventory
- Hiring more people to handle the new workload
- Updating the production quotas among their staff
These steps allow business owners to keep up with higher demands and watch their bottom lines grow.
If there’s an economic downturn in sight, they can adjust to cut the impact and loss.
Business forecasts got a big push after the Great Depression in the 1930’s. Complicated formulas and methods of collecting sales statistics were created. This was an effort to avoid another economic catastrophe.
While business forecasts aren’t always accurate, they are useful resources. They bring understanding the causes of economic fluctuations.
Business forecasting makes it possible for small business owners to retain control of an economy they don’t have power over.
Types of Forecasts
There are many strategies used for business forecasts. All of them fall into one of two categories: qualitative and quantitative.
The Qualitative method is most productive when it is used for short-term predictions. They depend on market mavens (well-informed investors) instead of stats. Because of this, qualitative models have their limitations.
Examples are polls for market research and opinions from field experts.
Quantitative methods remove people from the equation and focus solely on the numbers. The variables this method uses can be sales, housing prices and gross domestic product.
Business Forecasting Tips
Forecasting can be the difference between exceeding goals and missing them entirely. We did some searching and found a few simplified business forecasting tips.
Our advice can easily merge into your business planning strategies today.
Look at Your Expenses Not Revenue
This analysis is especially true with new businesses and startups. Estimating the costs of reoccurring monthly bills establishes a foundation for a starting price point. Since new companies don’t have a point of reference or history for their revenue, this is a powerful tool.
These expenses include:
- Rent for office or store space
- Utility bills
- Phone and internet bills
- Legal fees and insurance
- Equipment like computers or copy machines
- Employee salaries and benefits
It’s safe to overestimate costs for advertising, legal fees and insurance. These expenses tend to surpass the predicted amounts.
Know the Market
Forecasting is more than looking at the way your business performs. Yes, your stats are important factors, but there’s a bigger picture. Forecasting is about the way the market performs as a whole.
Forecasters should be asking themselves who the customers and competition are respectively.
Understanding consumers’ needs for a business and how competing companies are meeting them is priceless.
Know the Reasons for Forecasting
A forecasting strategy shouldn’t change based on the reason for the forecast. But the way the data is organized should differ depending on the intended audience.
A business forecast can be created for an outside investor or bank. If your purpose is to ask for more funds, investors might want to see specific types of data.
For example, when a new product line is launching, they can ask how it’ll pay for itself. The data the forecast should highlight is how the new line will impact revenue.
Another section can display what types of resources will be required. Sometimes categories will need to be broken down more based on who will be looking at the forecast.
Do Forecasts for Conservative and Aggressive Cases
New business owners tend to go back and forth in their thoughts about income. In conservative cases, the train of thought is based on facts and rationalizations.
Aggressive cases are those that involve more dreaming than strategizing. A conservative forecast may not involve hiring employees to do sales because there isn’t a strong need for it at the time.
An aggressive forecast wouldn’t just include making those hires. It can involve awarding bonuses or commissions based off of the hope that business picks up.
Don’t force the aggressive thoughts into silence. Allowing yourself to think both ways can help you find a safe and sensible middle ground.
How Does Your Client Base Compare to Your Employees?
Many entrepreneurs start out playing the roles of owner, sales, customer service, manager and bookkeeper all in one. However, as a business grows, new employees are often considered to decrease the owner’s workload.
Look at the number of active clients that are coming in compared to the number of employees. Divide the number (use 1 if it’s just the owner) of employees by the total amount of clients you have.
The workload might be alright for a single person right now. But if after your business has grown in a few years, will you still be able to deliver quality on your own?
Do you see yourself needing to turn down work? Or perhaps, you’ll discover a new revenue stream you’ll need help producing.
Forecasts are designed to go through multiple edits. If you think you’ll need help soon, update the employee salary section of your forecast. When this is done, you’ll determine if the revenue will support new hires.
Regulate the Forecasts
This is where past forecasts are compared to what really happened. Any inconsistencies should be identified and then refined for future predictions.
Set a Plan for Sales and Discounts
Popular discounts retailers offer are promotional discounts, clearance markdowns, and holiday sales. All three of these discount opportunities should be implemented in a business forecast.
Discounts attract customers and increase sales. Meaning, there will be a greater need for sales associates, supplies and inventory.
Consider using a calendar to help with this part of forecasting. Plan sales for well-known holidays like Christmas, Thanksgiving and Mother’s Day. But take advantage of some of the silly, made up holidays out there.
These can be fun, especially if a company’s products relate. For example, the Cheesecake Factory celebrates National Cheesecake day every year by selling half-off slices. They sometimes debut a new flavor that day too.
Promotional discounts are to be planned during the season there’s a high demand for the product. Clearance markdowns should occur toward the end of that season.
If these sales have a place in the forecasting process, it will be much easier to manage inventory. You don’t want to have too much or too little product at a given time.
Work Smarter, Not Harder
Financial forecasting is one of the most stressful tasks entrepreneurs have to complete. An incorrect forecast can cause wasted inventory, negative account balances and an upset customer base.
There are online forecasting tools for those business owners who are terrified of making an expensive mistake.
There’s no shame in taking a little extra help.
Contact Us Today
Business forecasts are hardly ever 100% accurate or set in stone. However, that doesn’t take the importance away from the process.
After putting these plans into writing, entrepreneurs need to remember to track changes. Profits and interruptions should be noted as they come.
A business forecast completed today will see many edits as the months pass. Even if it’s an excellent one.
Fluctuations are normal and should not cause panic. Documenting and understanding these patterns as they pertain to your industry will become less taxing over time.
If you find yourself in need of extra guidance, please feel free to contact us or review our FAQ page. Our experts are here to make business forecasting, bookkeeping and much easier.