How to... Forecast your business future
Like any business owner, you work hard every day to grow your business and make it a financial success. So it’s important that you don’t get so caught up in the every day running of your business that you forget to take long-term strategy and planning into account.
What is business forecasting?
Business forecasting is when you estimate or predict future developments in your business, such as sales, profits and expenditures. Forecasting has become an invaluable tool for business people to foresee economic trends and how best to deal with them in a positive way. Many people agree that precise business forecasting is much more than just using an established formula. Forecasters will use their experience and instinct to best judge the business forecast.
Do you need one?
Absolutely. Having an understanding of where your business is going will help you plan for the future - you could find without it you run into trouble or unexpected financial difficulties.
What can the financial forecast be used for?
- It can let you know how viable your business will be in the future
- Identify how much your business needs to generate in order for you to make a living
- Help pinpoint areas where you can save money
- Co-ordinate business activities that allow the business objectives to be achieved
- Provide valuable information and guidance on business decisions
It is normally expected that financial forecasts be set for a minimum of 24 months to allow you to identify any shortcomings in the business such as a lack of funding or cash flow problems.
There are two types of forecasting methods: Qualitative and Quantitative. Qualitative forecasting employs the judgement of experts to generate forecasts. This can be applied even when old data is not available.
Quantitative forecasting methods are used when old data on variables of interest is available. There are two quantitative methods – the first uses past trends in order to make a prediction of the future. The second is known as the casual method - even though it still uses historical data it relies more on several variables and their cause and effect relationships.
It is highly recommended that you receive help from an accountant, who will work in conjunction with you and help flag any issues, that need to be addressed. This can also be where you gain tax advice making sure your business is the most tax efficient.
Problems with forecasting
Every business needs business forecasting as it allows you to plan ahead financially. On the other hand, though, there are problems on relying on forecasts:
Most people in business will use a combination of these methods and techniques in their attempt to forecast their business future. With each cycle of forecasting, more is learned about what to consider and how to judge their importance in projecting future events.