Do you want to know how to ace forecasting and growth for your business? You’re in the right place! We spoke to a Senior Accountant at Osome, Taimur Ghafoor, who’ll be delving into some of his top tips. He has a wealth of experience in business financial management across a variety of sectors. You should walk away from this blog post with at least a few gems that you can apply to your own business.
What is forecasting?
So what is forecasting, and why is it so crucial to businesses? Forecasting uses data to help you understand where your business could be in the future. This data could be your own from previous months, or you could even use another businesses historical data, if they’re doing something similar to you.
You can use the data to create an informed report which will predict your future, and give you an idea about the direction that your business is going in. It can help your business to achieve sustainable success and stay focused.
Your forecast should also mirror your business plan. If you’re looking to grow your business within the next 6 months, your forecast should reflect that, and together they should go hand in hand.
How do you forecast?
There’s two ways to forecast, using quantitative and qualitative data. Quantitative uses numbers such as your expenses, and the sales you made during the previous 6 months. Qualitative is slightly different in that you will look at expert predictions and trends in the market.
If you’re just starting your business, qualitative would probably be the better option, and if you’ve been in business for quite a while, you can use quantitative.
You can also use both of these methods to produce a report and understand where you are and where you could be.
Even though it might sound quite complex, the key is to keep it simple. Large organisations often make their forecasts very technical, but you don’t need to do that. The aim is to help you grow your business in a clear and focused way. The more people that can pick up the forecast and understand it, the better. That means it will be easy for you to follow.
Lots of people get confused about the difference between budgeting and forecasting. The simple answer is that budgeting is what you want to happen, whereas forecasting is what you think could happen. Forecasts are typically more strategic, and are updated much more regularly than a budget would be.
Often there will be gaps between your budget and your forecast. Doing both helps you to delve into these gaps and close them.
The phases of forecasting
- Data: The first thing you need to do is collect the data, whether that’s qualitative, quantitative or both.
- Events: Next, you need to look at regular or significant events that have come up in your data. Is there anything that has, or could affect your business?
- Demand: Looking at your data will help you to identify what the demand is like for your products or services, and how that demand can fluctuate based on events.
You now have the basis of your forecast.
- Compare: Now that you have your forecast set up, you need to make sure you keep a close eye on it. On a regular basis, you should compare how your business is performing, to what you’d planned within the forecast. If you forecasted that within 6 months, you’d do £100,000 in sales, but yet you only did £80,000, you can try and find out why that was. Why did you not achieve what you thought you would – was their a key event which affected your sales, did you not account for the event within your forecast?
- Adjust: At this point, you can adjust your forecast and business plan. Forecasts are made to be flexible, they’re not strict and rigid, and can be adjusted based on the situation you find your business in.
- Repeat: The final stage is to go through the previous stages again. Once you’ve reached the end of your original forecast, it’s important to make sure your data and findings are updated.
Top forecasting tips
Why and Who: Whenever you go into a project and want to create a forecast, you need to think about why and who. Forecasting can be costly, and it can be time consuming too, therefore, if it’s important to think, ‘why am I doing this, and is it going to be worth my while’.
If you decide to go ahead, always try and keep it as simple as possible. When you forecast, you’re not only doing it for yourself, you’re doing it for a wider audience, like your management and any third party investors. They all need to understand what information you’ve used to come up with the forecast.
Realistic but Optimistic: You need to make sure that your forecast is realistic, but also optimistic. Not only does this look good for potential investors, it will also be good for yourself. Forecasting isn’t about putting small and safe figures, it’s to help you push and achieve growth. However, even though you probably want to reach for the stars, don’t be silly with it. The forecast will be used by a lot of people within the business and if you miss it by a huge amount, your reputation could suffer.
Key Ratios: Within your forecast, you should include calculations such as Return on investment (ROI). ROI is an important formula which is used a lot in budgeting and forecasting. If someone was to invest in your business, they’d want to see what the return on their investment was likely to be. Return on investment is a formula that is used to generate a percentage, and this would show the investor, for every pound that they put into your business, how much return would they get back?
You should always work this out before approaching an investor. If you know your ROI, you can sell your business a lot better and a lot more confidently. You can turn around and say, ‘based on my numbers, this is what you will get back’.
Know Your Data: Always know your data, and understand exactly what you’ve put into the forecast, and what each of your different forecasting elements mean.
What does the perfect forecast look like?
It’s difficult to say what the perfect forecast would look like, because it really depends on the size of your business, the years you’ve been trading and your business model.
However, you should be able to follow the tips mentioned above and create something that works well for you!
If you’re going to take anything away from this blog, it’s that your forecast should be:
Simple: Anyone should be able to pick up the forecast and understand it. It should be easy to follow.
Optimistic: The forecast should give you something to aim for, it shouldn’t be safe.
Data: You should know the data that’s in your forecast and understand it. You should be able to relay it back to employees and investors.
Finally, our number 1 top tip, is to regularly look at the information in your forecast and update it. Once is not enough, forecasts should become a habit.
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