Whether you’re a veteran small business owner or just starting out, we can’t emphasize enough just how critical business forecasting is for your short-term and long-term prospects. Today’s marketplace can shift at a moment’s notice, and you need to be ready to react accordingly. Thus, any tool that can prepare you for what may lie ahead is an invaluable one.
Enter the business forecast. You might not be able to literally see the future, but with the right metrics and tools in place, you may very well be able to anticipate what the future holds for your market and your business. Here’s how you can get started.
Basics of Business Forecasting
The deeper your company’s history, the easier it is to extrapolate what may happen next. If you’ve never created a business forecast before, there’s an easy enough way to begin.
- Since you don’t have much in the way of revenue figures, the road to your first business forecast starts with your expenses. These are, after all, far easier to compile ahead of time, and they’ll serve as the foundation upon which you’ll be able to build out any forecast for your business. Just be sure to include both fixed costs (rent, utility bills, etc.) as well as variable costs (goods, customer service, etc.).
- As you won’t have any reference points for your revenue and growth forecast, you should take care in your projections. Don’t let wishful thinking get the best of you. Instead, embrace an approach that simultaneously hopes for the best and prepares for the worst. You might create alternative visions of how your business will perform, including varying price points, support staff, marketing channels and products.
Tips for Robust Business Forecasting
Of course, the more effort you invest in your business forecasting, the more accurate your assessment of the future will be…meaning you can pinpoint decisions that will actually make a difference in your business. As you forecast, here are some tips to keep in mind to maximize your revenue and future growth.
Take Your Market Into Account
Many small business owners focus too closely on their own performance, forgetting to factor in the larger picture. But how your market behaves will inevitably shape your business, whether through larger industry trends or simply the superior tactics of your competition. In any case, you need to expand the scope of your business forecasting if you want to translate market conditions into positive growth.
How you develop this knowledge may vary (more on that later), but the amount of detail involved should remain the same regardless of what business you’re in or the market you serve. The secret to increasing your market share lies in understanding the context in which your business operates. Running your business in a bubble will only lead to devastation when said bubble inevitably bursts.
Create a Range of Scenarios
We live in a world of possibilities, and when it comes to business, you can’t be overprepared. Because you never can be sure what the market will do next, the best course of action is to create several forecasting variations that cover a wide range of potential outcomes. In all likelihood, you’ll probably be faced with something between your best-case and worst-case scenarios. But because you anticipated both of these extremes, you’ll be better equipped to take action than if you simply assumed your single business forecast was spot-on.
If everything works out remarkably in your favor, you won’t have to worry about how your business might be affected. Conversely, if you have a particularly rough month, you won’t have to scramble to save face under dire circumstances. Instead, you’ll have a contingency plan in place to pivot your resources and protect your business’ long-term profitability.
Preparing a variety of plans isn’t only the smart way to go regarding your business forecasting, it’s also the most responsible — it may actually be the only thing preventing your business from facing a rude awakening if the market goes sour.
Calculate the Basics Upfront
Although it’s essential to extrapolate your business forecasts from one extreme to the other, you first need to establish a baseline for your own data. In many cases, you can start by calculating your financial and sales data for the current period and each previous one. This will give reliable amounts for your average expenses and revenue, which both contribute to any forecasting you pursue. The more in-depth you can get with your numbers, the more likely you are to isolate trends that could inform what you do next and reveal surprising new directions.
Key metrics may include fixed expenses, variable expenses and revenue breakdowns, but remember to factor in profit margins and interest rates too. Both tend to slip by small business owners since they don’t tend to play as obvious a role in business forecasts. Yet, profit margins and interest rates can evolve into comparative figures you can use to identify achievements and opportunities for improvement as your business pushes forward.
Explore Different Methodologies
This all may seem a bit technical, but make no mistake: Business forecasting involves as much art as it does science. Much of this distinction stems from the various methodologies you can use when setting out to build your business forecasting model. Overall, they boil down to either quantitative or qualitative models. Before you shape your own forecast, consider which model you want to use (or decide on some combination of the two).
The former focuses almost exclusively on existing data and takes a more mathematical stance on business forecasting. Quantitative models closely examine relationships between different figures and assess for correlation, in hopes of applying this relationship to future projections.
On the other hand, a qualitative model relies on the larger marketplace and the human factor more than pure data. Market research and industry experts are integral to a qualitative business forecast, which aims to encompass a larger view of a business’ potential performance. This approach tends to be more accurate when it comes to short-term projections.
Revisit Your Figures Often
No matter what type of business forecasting you conduct, be careful not to slip into complacency. Just as your business and its market are in a constant state of flux, your predictions should be too. If you’re in the habit of forming a business forecast annually just for reference, it’s time to shake things up.
Though it might seem like an unnecessary investment of your time and resources, updating your forecast regularly to reflect your monthly numbers can go a long way toward shaping your future business strategy. It also presents an opportunity to correct course if a particular direction is negatively affecting your bottom line.
If you wait too long to incorporate actual figures into your short-term and long-term business forecasts, you risk steering your business too far down the wrong track. Ultimately, this undermines the usefulness of your forecasting efforts, leaving you to largely rely on guesswork as you guide your business forward. Moreover, evaluating your forecasts at least monthly can set you on an upward swing that can benefit your revenue, your growth potential and your ability to better predict both in the coming months and years.
