How to start effectively forecasting within your business

My last post talked about the importance of forecasting and planning within your business, so hopefully you’ve decided to get some systems and processes in place to help you do that.

But, how do you go about it, and how do you know how accurate your forecasting will be? You want to ensure that it’s as close as possible to what is likely to happen, otherwise what’s the point?

So this post will give you some advice on how to do just that.

The key thing is that knowledge is power. The more you know about your business, and about the industry you are operating in, the better and more accurate your forecasts will be.

Start with your business plan. Revisit it to see how close the initial predictions were to how you are operating your business now. You will probably need to update it based on your current growth, and then extrapolate from that. Investigate market figures around you, has the size of the industry grown/declined? Are there any new entrants to the market? Has any legislation been introduced which would have an effect on how you operate? You’ll even need to consider factors such as overall economy growth, for example, has the decrease in interest rate meant that any investments you have will be performing better or worse?

Your forecast also needs to build in some flexibility. Some clients I have worked with have told me that they have delayed making decisions in their business because they aren’t sure about the market conditions, and so until there is some stability, they have been unable to take any steps to move forward in their business.

The key here is that there is always likely to be some element of uncertainty, and so my advice is to factor in some movement either way, so that a rise or fall in the market won’t necessarily hold you back in making decisions affecting your business, such as pricing etc.

Also, don’t plan too far in advance. It’s good to have a 5 or a 10 year plan for your business, but equally, it’s more important to think about 30, 60 and 90 days’ time too. Things can change a lot in that time, and you will need to look at it regularly. It’s no use going to all that trouble predicting your performance if you don’t evaluate your actuals against the predicted figures. So factor some time in your business to look at it every week.

There are a number of business forecasting tools available, so consider trialling some to look at. It’s always good to be able to compare to past performance to see how accurate it is.

Ensure that you have processes in control to keep the money coming in and going out as you have forecast. You might have forecast correctly, but if money is being delayed coming in from clients, and suppliers are chasing you for money in return, it can completely skew your figures. So ensure you are on top of chasing any late payments.

Forecasting is used for many things within a business, including being able to secure any funding, so it is important to be as accurate as possible. It can be tempting to be over enthusiastic in order to get investors to fund you the cash, but you want them to keep supporting you and trust that you have a handle on the finances.

So you can see how important it really is!

Start with your cash flow, it may take some trial and error, but the more you are on top of what’s going on, not just in the business, but also within your industry, then the better prepared you are to make decisions that help your business to grow.