What conditions will affect your revenue and cash flow? How should you allocate your resources? Which goals should take priority? These are just a few of the questions business owners face when planning for the future. Fluctuations in the economy, your industry, and your local market can make it difficult to predict your performance. But knowing the fundamentals of business forecasting can help you see the bigger picture, set realistic expectations, and make better decisions as you move forward. Before you can start forecasting, you need to understand how it works.
It’s More Than Guesswork
An effective business forecast is based on realistic assumptions and careful analysis. For example, if you’re forecasting the first-year revenue from a new service or product line, you won’t have existing revenue data to draw from. Instead, you’ll need to look for comparable situations.
Consider how another service or product line performed in its first year. You can research the performance of products from similarly sized competitors or look at the market demand for your new offering. Adjusting your forecast over time can help you identify which types of information are most helpful.
Weighing Revenue and Expenses
As you develop and fine-tune your forecast, be sure to address these interconnected areas:
- Sales: Depending on your industry, sales activity may depend on your number of sales reps, number of qualified leads, promotional efforts, expectations for distributors, inventory in retail stores, and seasonal trends that affect demand.
- Costs: Consider how sales activity influences your costs. For product-based businesses, look at costs such as stocking fees, administrative costs, co-promotion fees, and economies of scale that affect your production cost per unit.
- Business expenses: Your forecast should anticipate recurring expenses related to your staff size, payroll and benefits, facility and equipment costs, and marketing expenses.
By considering the influence of these key factors, your forecast can provide a more accurate view of the new product or service line’s potential.
The Benefits of Forecasting
A practical business forecast can give you a clearer picture of your needs, opportunities, and risks. This information can help you to:
1. Control expenses: Looking at expenses over a longer timeline can help you determine when to hire a new employee or make a big purchase to upgrade your company. It can show you places to trim costs each month and streamline your budget.
2. Project cash flow: Your forecast can help you manage your cash reserves and understand your outside financing needs. That information makes it easier to educate prospective investors or lenders about the financial strength of your business so they can make decisions in your favor.
3. Identify areas for improvement: When your forecast falls short, you can use the experience as an opportunity to identify and address the underperforming aspects of your company.
Once you’ve developed your forecast, consult it often and adjust your projections as circumstances change. By taking time to learn why some predictions proved correct and others did not, you can learn ways to improve the accuracy of each forecast.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
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Nu Direction Lending is a digital-first business lender that was formed and is funded by credit unions. We combine the speed and convenience of online lenders with the personalized touch of the local credit unions who help fuel our local economies.