When you're busy running day-to-day operations for your small business, looking at the big picture may seem complicated or intimidating. Forecasting, or using your business's financial data to make predictions on performance, is an essential process that can make big-picture decision making simpler.
With accurate forecasting from an accountant, you can plan for the future effectively. That may include deciding when to hire new employees or buying new rental properties. In some cases, financial forecasts are required — like when you're working with investors or lenders.
Knowing what forecasting is and what you need to do it effectively can take the guesswork out of your business planning and help you make smarter business decisions.
What is financial forecasting?
Forecasting is a broad term for using your prior year financials to predict what can happen in the future. Instead of just guessing how much you're going to make, you can look at past sales and spending patterns and/or customer trends to predict how much you'll make each month, quarter or year. You can look 1-3 years into the future of your business this way.
Accurate bookkeeping is an essential part in creating financial forecasts. It helps create your major financial statements — like your balance sheet, income statement and cash flow statement — which are a major component in predicting how your business will do in the future. So before creating a financial forecast, it's best to clean up your books or work with an accountant to make sure they're accurate.
Why do I need to do forecasting for my small business?
Creating forecasts can help you set the right goals for your business and leads to growth in the future. Businesses that don't forecast may be missing information that impacts future earnings.
Forecasting helps you understand the seasonality of your business and plan for it. If you sell more products in the summer or winter, depending on your industry, you can use that data to adjust your staffing and inventory for that season ahead of time. For instance, you don't want to be caught without rental properties if you're about to receive an influx of interested tenants if you work in real estate.
Using forecasting, "what if" planning in particular, to prepare for those situations can also help you manage your cash flow. You can understand when you may have more cash on hand to plan major purchases or hire new employees.
The more accurate your books are, the more accurate your forecasts will be. Forecasts are not a guarantee, so using more data and having an experienced bookkeeper or accountant help you create them leads to smarter business decisions.
What do you need to create a financial forecast?
You might need different sets of data or information, depending on what method of forecasting you decide on. All forecasting starts with your quantitative data sources:
- Financial statements (balance sheets, income statement, and cash flow statements)
- Sales data
- Inventory data
As your company and empire grow, you’ll begin to realize additional value in qualitative research through market trends, focus studies, and more experience-based data collection and analysis such as NPS scores from existing clients.
Whichever method you use, accurate books are a must. Accounting software can aid you in the forecasting process by simplifying your bookkeeping and creating financial statements for you. Even with accounting software, it's helpful to have an experienced bookkeeper look over your work to ensure its accuracy.
Can I create business forecasts by myself?
Yes, you can create forecasts yourself with specialized business forecasting software. But any small business owner, especially a new one, should reach out to a qualified accountant to review their forecasts and the bookkeeping it was based on. In addition to accuracy, an experienced accountant is also a neutral party who can help you avoid gaps and point out opportunities you may have missed.Just like how forecasting can influence your business decisions for the better, it can also negatively impact your business if the data behind them is inaccurate or faulty. If you don't want to regularly work with an accountant to help you with your books — which is most often worth the investment — it's still worthwhile to have one complete an accounting diagnostic and ensure your financials are accurate for forecasting.
What can I do with my forecasts when they're done?
Creating the forecast and accurately maintaining your bookkeeping are only one part of the equation. The other part is interpreting the forecasts and using them to make smarter business decisions.
Once you have finished your forecast and have it reviewed for accuracy by an accountant, they can help you create your annual budget. For this purpose, most business owners will begin forecasting in October so that they have their budget for the next year ready to go January 1.
After your budget is created, the next step is to measure how well your business is doing compared to your forecasts. You can do this by taking time each month to review your financial reports, specifically your Actual v Budget report. If you're performing on par with your forecasts, then you know your strategy is working. But if your business's performance is lagging, then you can swiftly make changes to get back on track.
Once you integrate creating forecasts and analyzing them effectively into your business strategy, you can set a course for growth — and have the right resources to keep growing.
The bottom line
Forecasting is an essential business tool that can help business owners predict how the business will perform in the future. By keeping clean books and creating accurate forecasts, you can make deliberate decisions that lead to growth. A thoughtful business strategy based on past data is much more likely to succeed than waiting for a lucky break.
Ready to start planning for success? Schedule a call with DiMercurio Advisors and let our experts help you secure the future of your business.
