One way to significantly improve your business decision-making process is by generating and reviewing management reports on a regular basis, but historical information can only tell you so much.
In business, it is vital to plan for the future. To make genuinely informed decisions about your future business strategies, you need to be able to predict what likely events in the future. Using forecasting tools to produce detailed forecasts and scenarios will give you the best chance of predicting the road ahead. Forecasting is invaluable for businesses operating in this highly competitive and fast-changing environment
What is forecasting?
Forecasting is predicting future events based on past data and current trends. For example, businesses use forecasting to make decisions about everything from production levels to marketing budgets.
The different types of forecasting
Cash flow forecasting is a type of forecasting that looks at a company’s future cash inflows and outflows. This process can be used to estimate how much money a company will need to run their business in the coming period. It can predict when income or investments are likely to be received and when expenses, stock purchases, tax liabilities etc., need to be paid. It allows you to plan for the future to ensure funds are available when needed.
There are many different types of forecasting that businesses can use to predict future cash flow.
Trend analysis is the most basic type of forecasting and can be used to predict future sales, demand for a product, or other factors. To do trend analysis, you look at past data and identify any patterns or trends. The results of this analysis can be used to extrapolate into the future. For example, if you have seasonal peaks and troughs, you can start to predict future sales and plan to take advantage of the peaks by investing surplus funds to cover your business expenses in leaner times.
Regression analysis is a more sophisticated type of forecasting used to predict Continuous variables (like sales or profits) based on many independent variables (like economic indicators). Regression analysis is typically used when there is a clear relationship between the dependent and independent variables. For example, you might forecast that your sales will increase by 10%, so your stock levels need to be similarly increased. As a business will often need to procure (and pay for) stock before it’s sold, there will be a negative cash flow effect before your income is realized. This could create a cash flow crisis if not planned for in advance.
Time-series analysis is another common type of forecasting used to anticipate future values based on past results. Time-series analysis takes into account factors like seasonality and cyclicality when making predictions. For example, if you know that sales always spike in December and drop away significantly in June, you can prepare for those events to ensure you have sufficient stock ready to sell in November and run-down stock levels in May.
Run regular cashflow forecasts
Positive cash flow is vital to your business’s short, medium, and long-term success. Without cash, you can’t operate the business efficiently.
Running regular cash flow forecasts is an essential part of managing any business. Having up-to-date information on cash inflows and outflows helps inform decision-making around cash management, budgeting and forecasting. It also provides an early warning system for potential cash flow problems, allowing businesses to take corrective action before it becomes an issue. Cash flow forecasting is a relatively simple process that can significantly impact the overall health of a business. By making it a part of their regular routines, companies can ensure they always have a good handle on their cash situation.
Using forecasting, you can extrapolate your numbers to which weeks, months, or quarters will be financially tight. With enough prior warning, you can proactively bring forward income (sales, discounts etc.) or reduce spending.
Sales and revenue forecasts
Keeping the business profitable is one of the key foundations of making a success of your enterprise. You want your sales to be as stable and predictable as possible, particularly if you’re looking to generate capital for fund growth plans.
Revenue forecasts work much like cash flow forecasting. Revenue forecasting calculates the sales revenue that is likely to be brought into the business across a future period. With better revenue information, you’ll be on top of your profit targets and be able to manage working capital more practically. Revenue forecasts will improve your potential to invest in new projects, hire more staff, and fund the long-term expansion of your business.
Scenario planning
What does the future hold? No one has a crystal ball to predict the future with 100% accuracy. Examining different scenarios allows you to run projections to predict possible outcomes and impacts. You will be able to determine which strategies are more likely to succeed and which may have unforeseen consequences. They can also assist with determining breakeven and tipping points.
‘What-if scenarios’ are valuable tools for making big business decisions. What if there’s an economic recession? What if our sales increased by 25%? What if we raised our prices by 10% next quarter? What if we lost a quarter of our customers? You can run these scenarios by plugging the relevant data into your forecasting engine and seeing how each option pans out. ‘What-if scenarios’ are very useful to determine what the worst (or the best) results might be.
Update your strategy based on your forecasts
As your business grows and changes, so too should your business strategy. A good business plan is designed to flex and evolve to meet the needs of the changing market – and the changing needs of your business strategy.
Key considerations to keep in mind when updating your strategy based on your forecasts:
1. Know Your Numbers
Forecasting is all about understanding the numbers behind your business. Before you update your strategy, you need to know what those numbers tell you. Take the time to review your past forecasts and see where things have changed. This is an excellent starting point to understand what might need to change in your strategy.
2. Be Flexible
Your forecasting should be flexible enough to allow you to vary your strategy as events evolve and circumstances change. Don’t be afraid to adjust the course if something isn’t working as you thought it would. The goal is always moving forward, even if that means making some mid-course corrections along the way.
3. Stay Ahead of the Curve
One of the best ways to use forecasting is to stay ahead of trends that could impact your business. For example, you can ensure that your business is always ahead of the curve by keeping an eye on industry trends. Keep up to date with what’s happening in your industry locally and globally. Knowing what’s just over the horizon will allow you to capitalize on opportunities and avoid potential pitfalls.
Numble Bookkeeping Can Help
Forecasting is a critical tool for businesses of all sizes. It can help you make informed decisions about where to allocate resources, how to respond to market changes, and what direction your business should take in the future.
Numble can help you develop forecasting for your business. We will work with you to understand your historical financial data and trends and use that information to establish a projection of your future revenue and expenses. This projection can inform your decision-making and give you a clear picture of what to expect in the coming months and years.
If you want to improve your forecasting skills or help develop a projection for your business, contact Numble Bookkeeping today. We would be happy to discuss your needs and offer a Free Consultation to all businesses!
