Have you ever wondered how to create a business forecast? You’ll have heard the term, I’m sure, and it might even be something that you’re aware you probably should have. But perhaps the idea of forecasting is a little daunting? Perhaps you don’t know where to start? Perhaps you’re not sure how useful it could be for you and your business? Well, in this blog we’re going to show you how to create a business forecast; why you should create one, and how to make it useful for you.
But first, here’s a great quote to get us started:
The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present.Paul Saffo
Why do I need a business forecast?
Well, have you ever looked at your annual revenue at the end of the year and wondered how you achieved it? Maybe you’re not sure, month-on-month, what money you have coming in and whether or not your income is sustainable? Perhaps you know you need to invest in your business, but you’re not sure when you’ll be in a position to do that? If you can relate to any of these, or indeed anything similar, it’s time you got control of your business finances at a strategic level. It’s time you created a sales forecast.
And you know what? It doesn’t have to be massively complicated. The first time you do it, it probably won’t even be that accurate. But it’s not set in stone. It can be updated – and should be! – as you learn more about your business.
How to create a business forecast
Essentially, your business forecast (or ‘budget’ is used to predict what is likely to happen in your business from a financial perspective. It should tell you how your business revenue will grow, on a month-on-month basis, and it should help you to track your resultant expenditure, and gross and net profit. And if you use a system like Xero for your accounting, you can even upload it, allowing you to track your performance against your predictions in real time.
1) Forecast your revenue
Start off by forecasting your revenue for each month, over a 12 month period. It’s important here that you don’t guess, but instead, be realistic. Base your assumptions on what you know. If your average monthly sales over the last year was a certain amount, for example, you could use that as a starting point. If you know that sales drop over the summer period but peak at Christmas, you can factor that in too.
And when it comes to growth, be ambitious, but realistic. If you’re selling something that costs £5 for example, forecasting growth of only a small of amount of units each month is probably too conservative. But if you’re providing a service that’s expensive, you might choose to forecast slower growth in terms of customer numbers.
2) Do the same with your expenditure
Then follow the same process, but with your outgoings. Again, think about the time of year – eg. you might need to buy more raw materials in times when there is likely to be higher demand. Or your domain name might only need to be renewed every other January.
Again, be realistic, and be thorough. Think about all aspects of your business and all possible expenses that you can think of. This not only minimises the risk of any unexpected shocks, but it also gives you the intelligence – in the form of your forecast net profit – to make investment decisions. For example, if you can see that you’re expecting a peak in terms of net profit in a certain month, that may well also represent a good opportunity to invest.
3) Measure and review
When we develop a forecast, but then leave it on the shelf, it becomes something of a pointless exercise. But when we use it; when we check in with it regularly, it becomes transformational. Not only can we measure our actual performance against our forecast. We can think about the reason for any differences. For example, if you actually delivered far above your forecast, you can afford to be more ambitious. If an anticipated high or low doesn’t come to pass, you consider lessons learned.
Keep using your other sources of intelligence to inform your forecast too. Look at your social media insights. Your website analytics and SEO results. Over time, doing this, and doing it regularly, will make your forecasting more and more accurate.
4. Make it useful
The final step is to make sure that your forecast is useful for you. We are all different, so it’s important that this, and any other strategic documents that you create for your business, are actually useful. You might need to develop and implement new processes, for example. Think about when you’re going to check in with your forecast, how often and to what end. Consider how you can connect your forecast and your day to day financial management.
It’s when we do all of these things, we become able to manage our business finances strategically, rather than focusing solely on the day-to-day. And all of a sudden, finances don’t seem so scary any more – and you’ve taken a significant, and so important, step forward in your business.
Once you’ve developed your forecast, don’t let it gather dust on the shelf. Use it. Share it with others (if you’re hoping to secure any sort of finance for your business, you’ll need to!). Remember -a good, well-researched business forecast acts as a health check for your business in the ‘now’ but also as an indicator of your future potential!
As you’ll have realised no doubt, we wrote this blog as an introduction to how to create a business forecast. So if you need some help to develop yours further, or you just want someone impartial to check in and sanity-check with, feel free to get in touch with us. We’d love to support you to develop your forecast, and to make sure you can use it.