A business forecast is an estimate of a company’s future performance, principally relating to its income, expenditure and profits. An effective forecast model will also gauge economic trends and environmental factors that can influence these basic calculations.
All types of companies, from SMEs to large multinationals, should have a well-organised forecast to work from. They catalogue an array of complex figures in the same place, helping you compose financial decisions with greater clarity and avoid detrimental spending practices.
If you’re looking to produce a new business forecast, here are some tips on how to get started.
Essentially, forecasting can be defined as the attempt to predict future outcomes based on past events. With this in mind, it pays to keep and maintain comprehensive details of company performance since trading began.
This is most likely to come in the form of an accountancy spreadsheet, typically detailing such information as sales income, inventory costs, marketing expenses, tax payments and profit margin. Break each component down and organise into monthly columns to provide a clearer view of individual areas.
A business forecast should contemplate how external factors can shape financial performance. For example, will forthcoming government policy regarding interest rates or tax changes eat into profits? The same applies if a big political event, such as a General Election or Referendum, is on the horizon.
Assessing the competition is another aspect to strongly consider. Have rival companies in the same industry recently emerged? Will they reduce the target market and affect sales?
Likewise, it’s not inconceivable that your suppliers will be affected by their own unique problems, thus raising prices and eating away at your profits in due course.
Forecasts that contain obsolete data are useless and can even have detrimental results in some cases. Regularly update your business information and keep in touch with market fluctuations to produce a more efficient forecast, ideally every 1-2 weeks.
Carry out a yearly overview of company performance, establishing if any particular patterns developed over the previous 12 months. If positive or negative trends emerged at a certain time, think how to either replicate or minimise the same pattern in the forthcoming year.
There are a variety of software accountancy tools that help with business forecasting, with programs such as Excel and Sage widely used. They remove the need for constant manual inputting as algorithms calculate complex formulas on your behalf. Mistakes will be eradicated and vital man-hours saved, increasing overall productivity in the process.
Cloud-based software is an effective way to produce a business forecast and store company data, enhancing security and protecting against accidental damage or theft.
Remember that business forecasting isn’t an exact science. Many financial cycles aren’t repetitive and are triggered by environmental events – perhaps a fortunate exchange rate or isolated expenditure cost. Stay prudent, allow scope for error and remain realistic at all times.
For smaller business owners perhaps focussed more on growing their company than dealing with complicated economic patterns, it can be in your favour to seek specialised advice to help with your business forecast.
If you’d like to speak to a professional about your business forecast, get in touch for a chat.
If you’re working on your business’s forecast, you might also be interested in ensuring your business’s budget is balanced.