Forecasting is always a great idea for small business owners. Unfortunately, many business owners neglect to do their business forecasting entirely. Alternatively you may have been diligently forecasting each month and stopped once you found that reality turned out quite differently to your best laid plans.
However, your business will doubtless thrive by harnessing the power of regular forecasting to make better decisions. Just be sure that you properly understand what business forecasting is and what it can do for you. Think of it as your company’s GPS. You have to know where you’re going before you start your journey. Poor forecasting is like taking a trip blindfolded.
Regular forecasting tells you how much money is coming in, what your outgoing expenses are and when you’re likely to be bringing in profit. A financial forecast for your business gives you the time to respond to issues before they become a worry. On top of this, tracking your finances over an extended period of time will help you understand the big financial picture. This will help you when it comes to revenue and increasing your profits.
It’s important that you as a small business owner feel confident in your ability to forecast your cash flow, expenses and profits. As the small business landscape changes rapidly in response to easing restrictions and changing government legislation, you will have to be especially meticulous with your business forecasting. Being on top of your finances may be the difference between your business sinking or surviving these turbulent times. If you have a clear picture of where you are going and how you will get there you will be able to take advantage of the potential that these uncertain times hold. Keep on reading for 4 great tips to get on top of your business forecasting
1. Stick to the important figures
Most NZ small businesses would do well to focus on these key lines in a financial forecast.
- People costs (wages, subcontractors, drawings etc)
- Rent / Home office
- Travel / Motor vehicle
- Interest / loan repayments
- Capital purchases (assets)
Your business insurance is also an important point to consider when doing your business forecasting. The right balance of fixed costs and cover can make a huge difference over the long run. Fortunately, you can compare business insurance packages online with BizCover New Zealand. They provide multiple quotes from leading NZ insurers with no hassle, no paperwork, and no delay. You should always take your business insurance cover into consideration when making a business forecast.
2. Understand why you are forecasting?
Are you forecasting so that you can look at your figures each month and make decisions for the upcoming month? Maybe you’re forecasting to come up with quarterly numbers to show your stakeholders. Alternatively you might have done a business forecast to apply for a bank loan. Your reason for coming up with a business forecast will dictate how much detail you need to go into.
3. Know your ‘who’ and ‘how’
Forecasting is costly both in terms of time and money. You might come to the conclusion that engaging a third party to do the work is the way to go. Even if you go down this path, you and/or your team will still need to be involved in the forecasting process, as you know the business better than anyone.
You also need to determine the level of detail to which you want to construct your monthly, fortnightly, and even yearly forecasts. For instance, you estimate how much of each product, service or range you anticipate selling every month or quarter. If this isn’t the right approach for your business you could start off by making a yearly projection and dividing it into the appropriate time slots. For example, you could divide your yearly forecast by 12 to get a monthly forecast. Often these fast and easy forecasts end up being more accurate and achievable than forecasts that are reached through weeks of complex deliberation.
4. Are you a conservative or an optimist?
We’re not talking about having a great sense of humour or a sunny smile here. Being conservative means making a forecast that leans towards the worst possible outcomes. Being optimistic means that you forecast for a best case scenario. In other words, you need to strike a balance between planning for the best case while planning for the worst case. You also need to ensure that your forecast is not overly conservative or optimistic. An overly optimistic forecast might trip up your bank loan application when you find yourself unable to reach your targets. On the other hand, a lean and conservative forecast could breed complacency within your company. You need to see where your business is at and take stock of the economic and political climate around you before you choose a position.
If know you tend to forecast generously then scale down your targets to ensure they are achievable and challenging. This may be a time to look at your incentive structure and consider introducing one if you don’t yet have one in place. If you have a particularly good year you should strongly consider handing out bonuses to encourage your staff to keep up the good work. Another wise little trick is rounding up when making your expense forecasts to cushion you against the unexpected.
Different businesses will have to take into account different numbers and expenses. For instance, your business may incur significant material costs. When you understand which lines have the biggest impact, you can focus more time and effort on those lines.