Does Forecasting Affect Growth? You May Be Surprised
There are different forecasting methods, but the overall goal is to estimate upcoming profits and expenses. A standard forecast looks at the next 12 months. However, many businesses create one monthly or even weekly.
Understanding your business’s financial position can help you plan, budget, and avoid problems. What you might be surprised to learn is that it can also lead to growth.
Why Is Forecasting Important For Your Small Business?
Forecasting is a valuable tool for companies of all sizes. It can be especially vital for small businesses.
Ultimately, it helps you decide how to spend your budget. By predicting product performance, you’ll know how much inventory to keep on hand. You’ll understand which marketing or sales strategies are smart investments. You can tell if the cost of salary, benefits, and training for a new employee would be worthwhile.
Forecasting gives you an idea of future expenses, so you have cash on hand to cover them. You’ll be less likely to underestimate overhead costs.
An accurate forecast also helps you get ahead of potential issues. You might find that you’re operating with an unsustainable profit margin. You can then begin to work on cutting costs.
Ways That Forecasting Is Key To Business Growth
Financial forecasting doesn’t just help you understand how your business is doing and plan accordingly. It can provide the key to future growth.
You’ll be able to make wise decisions and avoid future issues. Plus, you’ll stay motivated to focus on business growth. This can help you manage cash flow, an essential part of a successful business. Your stakeholders will enjoy knowing where your business is headed.
If you feel overwhelmed by the idea of forecasting, don’t worry. There are some great tools that can make the process easy and intuitive.
Forecasting Helps You Make Better Business Decisions
Understanding your business’s future performance helps you make smart decisions. For example, your cash flow might slow down during a particular time of year. Knowing that’s the case, you can hold off on making large purchases of inventory or materials.
Using forecasting methods, you can find ways to finetune your marketing and sales strategies. If a particular campaign shows little sales potential, you can switch to a different tactic. You might find that certain products are growing in popularity within a specific market segment. You’ll then be able to focus your marketing efforts on that segment.
Watch The Growth Potential In Your Business’ Future
Starting a small business is often frustrating, and it can take a long time to get out of the red. In fact, many startups don’t become profitable until their second or third year.
Creating a financial forecast can help you stay motivated and understand how your business is performing. You won’t want to give up if you know that profits are coming.
However, if something just isn’t working, you can cut your losses sooner. Then, you can focus on trying out new ideas instead of simply getting overwhelmed and giving up.
Maintain Stronger Management of Cash Flow
There’s even a specific method called cash flow forecasting. You can look at cash flow over the next 90 days to understand your working capital needs. Or, you can look at a longer date range, such as 12 or 18 months. Doing so will ensure you know how much cash you’ll need for long-term strategies and projects.
If you find that you won’t have enough cash to meet your goals, you can begin working to increase cash flow. You might look for ways to cut costs, or you could decide to sell some inventory or other assets. Forecasting will help you determine how much cash you need to free up.
Forecasts Make Stakeholders Happy
A detailed forecast lets stakeholders know what to expect from your business. Stakeholders, including customers and investors, appreciate transparency. Sharing a forecast is a way to provide insight and show that you have nothing to hide.
If there are any concerns on the horizon, you can show that you’re taking steps to address them.
Businesses can always use more funding, and you might decide to bring in additional investors. Financial forecasts allow you to demonstrate to a potential investor that your company is a safe bet.
Forecasting Tools Allow For Ease Of Access
Anyone who works in a small business is preoccupied with day-to-day tasks and putting out fires. It can be tricky to find the time to look ahead.
You also might not know where to begin. It’s easy to become intimidated by different forecasting options. There’s also the possibility that if you put together a forecast yourself, you can misinterpret data.
Luckily, there are tools that make predicting your future finances easy. They range from straightforward to complex, so you can find the tool that meets your needs.
Some budgeting software includes forecasting options. These will help you understand and apply the information it provides.
Four Great Tools For Forecasting
Some companies do all of their forecasting using Excel spreadsheets. If you’re looking for options that are a little more intuitive and powerful, check out these tools.
- Centage offers a tool for smaller businesses called Planning Maestro. It offers different types of forecasts that cover rolling 12- and 18-month periods.
- Quickbooks allows you to use your business data to create a basic forecast. It doesn’t have as many different options as other forecasting software. Depending on your needs, it might provide the perfect amount of information. You can also use Quickbooks to create a cash flow forecast.
- PlanGuru specializes in financial planning and has options specifically for small businesses. There are more than 20 different methods included, and some are customizable. You can import data from Excel, Quickbooks, or Xero.
- Vena Solutions claims to reduce the time you spend producing a forecast by up to 99 percent. Its software works with Excel rather than trying to replace it, so this is a good option for Excel fans. It offers a suite of financial services, including rolling forecasts. The software also integrates with other systems like SalesForce.
Our Final Thoughts
There’s no way to predict the future. Uncertainty is always going to be part of running a small business. However, by using the available data, you can develop an accurate idea of where your business is headed. There are many reasons that financial forecasting is worth your time.
The key to benefitting from this method is to apply what you learn. Don’t let your data sit and gather dust. Instead, let it inspire you and drive business growth.
One potential outcome of forecasting is realizing you need some extra funds. Get a free quote from Fora Financial today.
Frequently Asked Questions
What is financial forecasting?
It’s a method of predicting the future financial performance of a company that shows how much profit and expense a business can expect for a particular time frame.
How does forecasting lead to growth?
There are a few ways that forecasting can contribute to growth. It helps businesses make good decisions, including better cash flow management. It keeps business owners motivated and stakeholders happy.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.