The most successful business owners don’t make decisions on impulse—they use business forecasts to look ahead. Business forecasting is the practice of estimating your company’s future sales, revenue, or cash flow using a combination of historical data and current market insights.
Most companies rely on business forecasts to get a more accurate picture of their financial trajectory, but forecasting can help you make more strategic decisions in every area of your business. You can use forecasts to:
- Plan for busy or slow seasons
- Adjust your timelines for accounts receivable and payable
- Address gaps in cash flow
- Create monthly, quarterly, and annual budgets
- Set realistic sales goals
- Plan for emergencies
- Assess whether or not you need a line of credit or term loan
- Plan for long-term growth
- Improve your sales or marketing strategies
It’s important to note, however, that business forecasts can’t tell you with 100% certainty where your business will be in the future. They’re simply a series of informed predictions designed to help you run your business smarter.
Types of business forecasting
The three most common types of business forecasting include cash flow forecasting, sales forecasting, and market forecasting.
Cash flow forecasting estimates the total amount of cash that will come in and out of your business during a given period of time. You can use cash flow forecasts to plan for expenditures and debt payments, evaluate your business costs, adjust accounts receivable and payable, and figure out whether or not you need working capital.
Sales forecasting estimates the amount of sales or revenue your business is likely to generate during a specific period. Sales forecasts can help you order the correct amount of inventory for busy seasons, prepare for downtime, make strategic hiring decisions, and analyze your business’s profit margins.
Market forecasting predicts future market trends, including changes in your market size, customer demographic, or industry. You can use market forecasts to review your marketing strategies, assess your competition, and find more effective ways to reach your customers or clients.
Business forecasting timelines
Every business forecast looks ahead to a particular period of time, whether it’s two months or two years away. In general, the shorter a forecast’s time horizon, the more accurate the forecast is. Here are the three most common forecast timelines:
- Short-term forecasts cover the next 30 to 90 days in your business. Short-term forecasting is a great way to identify your business’s immediate cash flow needs, plan for production, and set a monthly sales or revenue target.
- Medium-term forecasts generally look ahead one year. You can use medium-term forecasts to build annual budgets, set quarterly financial goals, estimate yearly sales or revenue, and explain your business’s potential to lenders.
- Long-term forecasts usually touch on business happenings that are several years out. Long-term forecasting tends to be more difficult because it’s further out into the future, but it’s a good way to map out your business’s long-term growth, set yearly benchmarks for success, or create a five-year business plan to show investors.
How to do business forecasting
Forecasting in business can be complicated. There isn’t one perfect method or formula to follow, but here are the general steps for getting started:
1. Choose your forecast type and timeline
The type of business forecast you’re interested in depends on your industry, business needs, and goals. If you’re concerned about your business’s cash flow for the next quarter, you may want to do a short-term cash forecast looking at the next three months.
If you want to map out a year’s worth of revenue, a medium-term sales forecast could be helpful. Or maybe you want to pitch your business to a potential investor; in that case, a long-term market forecast would be the way to go.
2. Pick your data point
Every business forecast needs a data point, question, or problem to center on. If you’re doing a short-term sales forecast, for example, the question might be: What will our business’s revenue look like over the next 30 days? If you’re doing a long-term market forecast, you may want to see how the size of your market will change over the next three years.
A central data point or question doesn’t just inform the type and amount of data you need to collect—it also dictates which variables you have to consider. If, for instance, you’re forecasting cash flow for the next six months, you’ll need to take the following into account:
- Your business’s cash flow over the past six months
- Your business’s cash flow during the same six month period from a previous year
- The various factors that affect your business’s cash flow, including your accounts receivable, your expenses, and your payment guidelines
3. Make your assumptions
A critical component of business forecasting is making assumptions. Assumptions guide your data collection process and dictate your testing methods, helping you narrow your focus.
Let’s use the same six-month cash flow forecast example as above. If your sales and production are fairly consistent, you could make the assumption that your business’s cash flow will be equal or close to the cash flow from the last six months. On the other hand, if your sales fluctuate—maybe because you run a seasonal operation—you might assume your business’s cash flow over the next six months will be sporadic or negative.
4. Use the right forecasting method and tools
There are two general forecasting methods: qualitative and quantitative forecasting.
Qualitative forecasting relies more on expert opinions and customer feedback than numbers. To gather data for qualitative forecasting, you might poll customers, ask subject matter experts for their predictions, or consult your business accountant for advice. Qualitative forecasting isn’t necessarily the most accurate forecasting method, but it can be helpful for long-term horizons and broad predictions.
Quantitative forecasting uses hard numbers and data to arrive at a conclusion. Depending on the exact method, you might draw from historical company data, current company data, or market statistics—or use a mix of all three. There are a handful of complex quantitative forecasting methods, but the simplest is time series forecasting, where you use past data to assess the future.
Business forecasting can be complicated, so it’s crucial to enlist the help of an accountant, financial planner, or digital forecasting tool. Most forecasting software integrates with your existing business solutions—like inventory management or payroll software—to give you the most accurate results.
Using a combination of machine learning and complex formulas, forecasting tools take into account factors like accounts receivable and payable, purchase orders, inventory restocking times, and even invoice approval times.
5. Compare your forecasts to your results
Forecasting isn’t over after you test your assumptions. The final step in business forecasting is to compare your forecasts to what actually happens over time. Reviewing your forecasts for accuracies and deviations helps you improve the process, so your future forecasts will be more reliable.
Make sure you take note of the data points you used, as well as any outside factors that might have influenced your results.
Forecasting for success
Harnessing the power of business forecasts can help you make smarter decisions around your business’s marketing strategies, finances, and long-term growth.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.