Do you know what your business is going to earn next month? Or how much you’ll need to spend on inventory in the next quarter? If not, you’re not alone. Many small business owners don’t take the time to forecast their company’s future performance. But forecasting is an essential part of running a successful business. In this blog post, we’ll discuss what forecasting is, why it’s important for small businesses, and how to do it. We’ll also give you a few tips on creating a budget that will help you reach your financial goals.
What Is Forecasting?
Forecasting is the process of looking at past and present data, as well as marketplace trends, to predict the company’s future financial performance. It enables you to gauge how much revenue you’ll potentially earn in a particular period and plan for big expenses. Forecasting is different from budgeting for small businesses, but they go hand in hand. The forecast predicts the results for the company, while the budget lays out how the business will get there.
Why Forecasting For Small Businesses Matters
Forecasts are all about the future. It’s impossible to overstate how essential it is for a business to have an accurate sales prediction.
Forecasting for a small business is important for several reasons. First, a sales forecast is used to make important decisions about the allocation of resources. Second, forecasting can help you track your progress and identify potential problems early on. Finally, a good forecast will give you a better understanding of your market and competition.
How To Forecast: Breaking It Down
When you work on any forecast, you need to step back and break the forecast down into pieces. What are the drivers behind the forecast?
When forecasting for a small business, these drivers will be things like the number of units sold and average selling price. No different than a large, well-established business! The difference in forecasting for a small business versus a large business is you are likely to have less data to work with.
Once you have identified the drivers, you need to think about how they will change over time. For example, if you expect your number of units sold to increase over your first year in business, by how much? And what impact will that have on your overall revenue?
While there are many qualitative demand forecasting methods, those methods tend to be in the domain of sales and marketing. We will focus on quantitative forecasting methods.
- Test Marketing – Sell products in one specific market and extrapolate that demand to similar markets
- Time Series Analysis – Use historical activity, including seasonality, to predict future results
- Regression Analysis – Use a variable that you know to forecast a variable that you don’t know
- Econometric Models – Replacement demand + new owner demand = sales
We will use time series analysis with a twist. We need to look at industry competitor data to supplement the data we have on hand.
The Forecasting Process
Step 1: Determine What You Need to Forecast
We’ll need to predict the following components in order to produce a reliable small business forecast:
Step 2: Collect Inputs and Assumptions
For each of the components from step 1, you will need to collect the inputs and assumptions behind them.
For a small business, you may not have enough historical data to build the model. If that is the case, your competitors can offer a lot of insight.
Step 3: Layout the Forecast Model
Once you have determined what to forecast and collected the inputs, it is time to start building a model. Forecasting models can be as simple or as complex as you want them to be. For example, if we’re forecasting customers for one store with many years of historical data, the spreadsheet for your model would be really simple.
On the other hand, if you are forecasting customers for 1,000 stores across a country, you will need a complex model with more details. For a small business, keep it simple and easy to work with.
Step 4: Run and Adjust the Forecast
Once your model is set up, you simply need to run it and adjust the inputs as needed. You will want to do this on a regular basis, especially if your business is growing or changing. Forecasting is not a one-time event; it should be done regularly to ensure that your numbers are accurate.
Step 5: Review and Summarize
You should look at your forecast results to ensure they make sense and summarize them in a way that works for your business. For example, if you are forecasting customers on a monthly basis, you may want to do quarterly and annual views. If you are forecasting by store, you may want to view by region. You may even want to look at trend views to ensure there aren’t any outliers.
Forecasting and budgeting go hand in hand when it comes to small businesses. Forecasting is the process of looking at past and present data, as well as marketplace trends, to predict the company’s future financial performance. It enables you to gauge how much revenue you’ll potentially earn in a particular period and plan for big expenses.
Budgeting on the other hand is the process of allocating financial resources to specific activities. Together, forecasting and budgeting give small business owners the tools for financial success.
Tips and Tricks
Finding Data And Assumptions
Forecasts are only as good as the data and assumptions you put into them. So where can you find solid data? If you have an existing business, the first place to look is your financial system. Historical data is one of the best inputs to a forecast. You can also work with your operations teams to understand what it will take to deliver a certain level of performance.
For a new business without historical info, you will have to dig a bit deeper. Economic data and market research are your best bets. This can include digging into resources like the Consumer Product Index (CPI) for inflation or studying your competitors.
Step Back And Do A Gut Check
As you get into the weeds of your forecast, it is important to step back and ask yourself, “Does this make sense?” Think about how the forecast looks year-over-year and sequentially. Do you have the capacity and workforce to even deliver the forecast? Do the trends seem reasonable or are there unusual outliers in the forecast?
It is critical to sanity-check your work and ensures you put out a great product
Build For the Future
When working on a forecast, do yourself a huge favor and build it for the future. Well, obviously a forecast is for the future, but I mean the model itself. If you are running a forecast today, you are likely to run the forecast again. Make sure the model is dynamic enough to pull in new actuals and roll forward for future time periods. Avoid hardcoding, and try to link everything up to data tables. Make it clear which periods and cells are actuals and which are forecast.
This may take some extra time to set up, but it will really pay off down the road.
Forecasting and budgeting are two essential tools that small business owners can use to ensure their financial success. Forecasting gives you a glimpse into your company’s future performance, while budgeting allows you to allocate financial resources to specific activities. By using data and assumptions to build accurate forecasts, small business owners can make sound decisions about their businesses’ futures.
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