Business forecasting is essential if you want to set your company up for success. Looking ahead can give you a greater understanding of your financial performance, allowing you to make well-informed decisions about your business’s future.
In this article, we explain how forecasting can add value to your business, no matter whether you’re a startup entrepreneur or an established business guru.
What is business forecasting?
At its core, business forecasting is about using data to predict your business’s future performance. While budgets generally outline your goals for the year ahead, a forecast will measure whether you’re on track to meet them.
Since no one knows exactly what the future holds, you’ll need to update your business forecasts regularly, perhaps monthly or quarterly. That way, you’ll always be making decisions based on recent data.
Types of forecasts
The benefits of business forecasting will vary depending on your method. While there are countless ways to draw up a forecast, each forecasting technique can fit into one of two categories: qualitative or quantitative.
Qualitative forecasting
Qualitative forecasting is usually based on information that can’t be measured, such as market research and expert opinion.
This type of forecast is particularly useful for startups, which have no historical financial data to pull from. Consulting experts and thinking about future trends can help new businesses predict their growth expectations in the short term.
Quantitative forecasting
Quantitative forecasting uses a business’s historical data to anticipate its future performance. This usually involves analysing past sales records, balance sheets and expense reports, depending on your forecast’s purpose.
There are pros and cons to each forecasting method, but using a combination of both can give you a more nuanced prediction. At the end of the day, forecasting is all about helping you understand and shape your business’s future, so you should think about which approach works best for you.
Check out our eBook, How to Future-Proof Your Business With Budgeting and Forecasting for a more in-depth guide.
How can forecasting help your business succeed?
1. Monitor your progress against targets
Tracking your business performance throughout the year is essential if you want to meet your goals. A good business forecast will tell you whether you’re on target or if you’re likely to fall short.
For example, a sales forecast can measure your actual sales data against targets. If your numbers aren’t where you need them to be, you’ll be able to adjust your short-term strategy to get back on track.
2. Identify issues ahead of time
Business forecasting can also play a key role in risk management. Analysing your financial data can help you identify potential issues early on, allowing you to address them before they become a bigger problem. Meanwhile, taking a more qualitative approach can help you stay ahead of market trends.
Budgets don’t always go to plan, but forecasting can give you more control over your business’s future.
3. Make better business decisions
Regularly updating your business forecasts is vital if you want to make well-informed business decisions. Frequent forecasting can give you a more up-to-date picture of your financial circumstances. The more informed you are about your business’s current performance, the easier it will be to take the actions necessary to protect its future.
Your forecasts can also play a vital role in your longer-term strategy. The more frequent your forecasts, the easier it’ll be to draw up future business plans and budgets.
4. Optimising resource allocation
Forecasting plays a pivotal role in optimising resource allocation. By accurately predicting future demand, sales and other key business metrics, you can distribute your business assets and resources more effectively.
For instance, forecasting can help you anticipate periods of high demand, giving you the opportunity to increase your inventory and staffing levels accordingly.
Future-proof your business with Lumin
These days, cloud accounting makes forecasting easier than ever. But while technology can be a useful tool, it’s not a replacement for real-life expertise.
At Lumin, we combine the latest technology with our accounting knowledge to create data-driven forecasts and budgets that help you move your business forward.
Want to future-proof your business finances? Take the leap by switching to Lumin today.
