How Forecasting is Good for Your Company
When the meteorologist on the nightly news forecasts rain next Tuesday, how likely are you to believe it? Fortunately, financial forecasting is more predictable than the weather!
Like weather forecasting, financial forecasting involves predicting future outcomes based on historical data, observed patterns, and current conditions. Financial forecasts can also be unexpectedly upended by unforeseen changes in conditions, even if we’re talking economic variables more than barometric pressure!
Like weather forecasting, financial forecasts are more accurate in the short-term and become less accurate the further out your predictions go. If you’re new to forecasting or to business, you might want to start small, by forecasting just a month out.
Newer businesses can have a harder time with forecasting because they don’t have the benefit of years of historical data to draw conclusions from. However, it’s still possible to extrapolate your own sales using industry trends, which can help you identify seasonality trends, such as booming business in the summer for a construction company and higher sales before the holiday for a retailer.
You can manually create financial forecasts after pulling data from your accounting software. This post from the QuickBooks Blog can walk you through the process or Certum Solutions can help you set them up. There are also accounting software programs that can create forecasts for you, which is definitely the less time-consuming option.
No matter your business’ size or age, you can benefit from creating financial forecasts. They can help you manage cash flow management, assess financial health, and make strategic plans.
Cash Flow Management
Forecasting allows businesses to anticipate periods when your cash flow is likely to be higher or lower. Having this information can help you manage working capital throughout the year. Understanding your cash flow can also help you plan spending and expenses, especially during leaner months. Perhaps you cut back employee schedules, or maybe you find a high-yield savings account to store funds you’ll need when business is slow.
Knowing when your cash flow is low might also help you decide when to schedule administrative, educational, or organizational time for yourself and your business. If the winter months are slower for you, it might be the perfect time to circle back to update your business plan or do mandatory education or training.
Financial Health Assessment
Regular forecasting can provide insights into your business’s financial health. With forecasting, you can determine whether historical trends would indicate that your current year is on track to be in the black or on par with your past performance.
If you update your forecasts to take new challenges or macro-level economic changes into consideration, you might be able to identify financial risks ahead. This kind of forecasting can help you take action to maintain profitability and sustainability. If you identify a potential financial risk, you have time to prepare a contingency plan to mitigate the risk. Being prepared for potential challenges is always better than being caught off-guard; it gives your business a chance to weather the storm.
Strategic Planning
Forecasting helps businesses identify growth opportunities and anticipate changes in the market, allowing you to make realistic strategic plans and enact them at the right time. Perhaps your forecast indicates another booming year of increasing sales—making it clear to you that it’s time to start scouting for a second location. Or it could indicate that it’s time to implement your plans for hiring your first employee.
This kind of data can also inform strategic changes to your operating budget or your pricing, for example. Predicting a strong year because of national economic changes could mean that you add more money to your marketing budget, allowing you to draw in more new customers before your competitors. Or you could strategically raise prices if your forecast indicates that inflation is soon going to impact business.
Move Toward Blue Skies with the Right Forecasting Tools
Does your business forecast look sunny with a high of 75? Or are storm clouds rolling in?
If you think you could benefit from accounting software that can help you with your forecasting and decision-making, such as QuickBooks Online or Sage Intacct, schedule time with us. We can help you make an informed choice about accounting software or apps that can give you the data you need to create your own forecasts—or to generate them for you!