How to conduct business forecasting

Thursday 15 August 2013

Whether you're running a start-up micro enterprise, a small business or a large organisation, forecasting is likely to be an important part of your role. In order to make key decisions which affect the running of your company, both in the present and going forwards, you need to be able to predict future developments. The ability to forecast - within a reasonable margin for error - earnings and costs can be highly valuable within any business, when it comes to setting budgets and rolling out the growth strategy.

Is forecasting a one-off job?

No, forecasting should be considered an ongoing duty for business leaders and finance specialists, as opposed to a one-off tick-box exercise. In order for forecasts to have any meaning or relevance, they should be updated regularly to take into account actual recorded results. If things are turning out differently to what you expected, take this quantitative evidence and make the necessary amendments to your forecast.

How can forecasts benefit your business?

Forecasting has the potential to help your business in a number of different ways. First of all, measuring achievements against predicted goals enables business leaders to see what is going on within their company. This process also offers a degree of insight into what companies are doing well, and where they might be going wrong. Effective forecasting can help businesses set clearer goals, both for the short-term and the long-term, and adopt a more strategic approach to meeting these targets.

You'll want to consider fixed costs - such as rent, salaries and utility bills - but also variables such as marketing, customer service and packaging spend. It may be wise to imagine a best and worst-case scenario for costs, and the same goes for sales and revenue - forecasting revenues using both a conservative and aggressive case.

How to conduct short-term forecasting

In the first instance, company leaders should be looking to predict levels of business activity in the coming month, quarter and financial year. As you go about preparing a short-term forecast, relevant considerations may be sales strategies - for instance, where revenue streams exist and where new opportunities may open up - and operational strategies - such as costs and overheads.

You also need to consider profit and loss accounts, balance sheets and cashflow - and this is where Excel 2013 may be able to assist your company. Particularly in small companies, where there is no dedicated finance department, the spreadsheet programme can be of great assistance. Excel 2013 has the ability to make advanced calculations, and present data in graphs, tables and charts, enabling it to be understood more readily.

The short-term forecast may change a number of times during any financial year, depending on a myriad of internal and external factors. If your company, and the trading environment, are relatively stable, you may only need to revise the business forecast every three to six months. But in periods of flux, or where market activity is difficult to predict, it may be worth revisiting the forecast every month.

How to conduct long-term forecasting

As well as looking at short-term performance, business leaders need to have a vision for the more distant future. With this in mind, it may be advantageous to forecast strategy and business performance over the next three to five years. This will be a requirement of the banks if you are planning to apply for credit - they will want to have a clear idea of where the business is heading, and what it expects to achieve in the coming years.

If major changes are planned to the business - in terms of structure, strategy, route to market etc - these should also be accounted for in the plan. New products or services in development could potentially have a drastic impact on sales and profitability, while the emergence of new technologies may make a significant difference to business costs.

Successful long term forecasts require business leaders to know their company, and know their industry. You need to think about changing consumers habits, business practices, policy and regulation, and predict how these will impact on your company going forwards.

Bringing your forecasts together

Both the long-term and short-term budgets have a role to play when it comes to setting the annual budget. Theoretically, the long-term forecasts should inform the short-term, which in turn provides a framework for the allocation of resources. You can use Excel 2013 spreadsheets and charts to communicate the forecast to staff, and set appropriate targets for employees based upon the overall short and long-term goals of the company.

To find out more about Microsoft Excel 2013, click here.

Posted by Steve Williams