Why you need Financial Forecasting for your small business!

Forecasting is extremely important for any business and is vastly under-utilized in small businesses.  It can be used to project cash flow, plan for big cash expenditures, or evaluate expanding into a certain niche. This type of forward-thinking tool provides for identifying new opportunities, planning capacity and guiding overall future strategies for success.

What is forecasting?

Forecasting is a planning process that analyzes both historical and present data to identify trends and estimate future outcomes.  When we forecast we look at revenue, expenses and other items that affect cash flow (think loan payments) and put together a prediction for the future.

Why is it important for Small Businesses?

Forecasting allows us to make more informed decisions. Running a business can be uncertain.  Small business owners know this better than anyone.  None of us can predict the future, but forecasting it can bring clarity, even if that clarity isn’t always good news.  Without a forecast you may not know about challenges that are brewing or new growth opportunities until it is too late.

Forecasting also allows us to pivot in the face of the unknown.  With a solid forecast in place, we can quickly create alternate scenarios when the unexpected happens.  Global pandemic?  Check.  Let’s adjust our sales figures, talk about technology expenses to move our staff remote, and analyze any niche areas for our services/products that may arise due to the situation.  When you have a forecast in place, evaluating the changes necessary becomes clear and is much less stressful.

Forecasts can be used for specific areas of your business as well.  Maybe you want to expand your service offerings but that also means expanding floor space.  Can you afford it? What is your break-even point? Quantifying those figures into a forecast allows for an informed decision rather than “well, this works so it should be profitable in the long run” decision.

How do you develop a forecast?

The process is guided by your end goal.  Most small business owners will benefit from a cash flow forecast model.  This is a general overview of your business and estimates the amount of cash you’ll have available in future months.  When it comes to incoming cash, you’ll need to understand the seasonality of sales, the terms you offer to your customers, and your general customer base as far as timely and untimely payers.  On the outgoing cash side you’ll need to know your regular monthly expenses, inventory needs, loan repayments and any tax obligations.  Also incorporated are any known future items that are out of the ordinary, such as aging equipment that will need to be replaced.  Once you’ve combined these data points you have a forecast. I suggest starting with a one year forecast.  If that seems too daunting, go with six months.

Keep in mind that forecasts are living projections. They should be reviewed monthly and updated as trends become apparent, as your obligations change and as the business environment of your industry changes.  I highly recommend getting input from an outside source.  Working closely with your accounting professional with give you objective input and will provide expert analysis.  In today’s business environment this step is crucial.

Here at EverythingCounts we are LivePlan Method certified and committed to providing business advisory services that include forecasting. For more information, please reach out today to schedule a free discovery call to see how we can help tame the beast that is your small business.