How to Make More Accurate Business Financial Forecasts
The new year means a new horizon for business leaders, which are drawing up their plans for the coming 12 months. And one of the most vital aspects of those plans are financial forecasts.
A financial forecast is a projection of a business’s future financial performance based on historical data, current trends and expected market conditions. Forecasts are essential tools for decision-making, enabling businesses to plan budgets, allocate resources effectively and set other goals realistically. They’re hardly guarantees, but they do help businesses anticipate challenges, identify opportunities and navigate uncertainties with greater confidence.
Accurate forecasting is more than just crunching numbers; it’s about using the right data, asking the right questions, and preparing for a range of outcomes. And while you shouldn’t ever expect to predict the future with pinpoint accuracy, you should strive to create more reliable financial forecasts for the coming year.
These tips can help you do just that!
1. Start with Historical Data
While past performance can never truly predict future performance, it can be useful in setting realistic expectations for the year ahead.
Before diving into the coming year’s forecast, you’ll want to gather historical financial data from the last few years — such as revenues, expenses and profit margins — and also analyze that data to determine whether there are any trends, and if so, what drove those trends.
Use this data and analysis to establish baselines for your projections. Just remember, again, that past performance doesn’t guarantee future results, especially in rapidly changing industries.
2. Get Input from Key Stakeholders
As they say, “garbage in, garbage out.” In other words, your forecast will only be as strong as the data that informs it.
While much of your information will probably come from the finance team, you’ll want to take a collaborative tack — one that includes information from other areas of your business. For instance, sales teams can often provide valuable insights into customer demand and market conditions, while operations teams might be able to highlight capacity constraints or efficiency opportunities.
Tapping brainpower from across your company can help your forecast reflect the full spectrum of your business operations.
3. Incorporate Market and Industry Trends
Of course, you don’t necessarily want a forecast rooted solely in your company’s internal data. To create a realistic picture of the future, you’ll also want to consider factors such as:
- Economic conditions: Monitor indicators such as inflation rates, interest rates and consumer confidence that could impact your industry.
- Industry shifts: Stay updated on trends affecting your sector, such as emerging technologies, new regulations or shifting consumer preferences.
- Competitor activity: Study how competitors are positioning themselves for the coming year.
This external context helps you align your forecasts with broader trends and avoid surprises.
4. Use Scenario Planning
No forecast will ever be 100% accurate, but you can improve its utility by preparing for different outcomes. Scenario planning involves creating multiple projections based on different assumptions.
Specifically, you’ll want to map out best-case scenarios (optimistic but plausible growth, favorable conditions), worst-case scenarios (facing numerous challenges, including abnormal issues such as natural disasters) and most likely scenarios (middle-ground projections based on historical data and current trends).
By planning for various scenarios, you can prepare your business for the unexpected while still focusing on your core objectives.
5. Leverage Technology and Tools
Modern forecasting tools can make the process more accurate and efficient.
Business owners have their pick, too. There are dedicated forecasting tools, such as Fathom, LivePlan and Float, which can offer features such as advanced analytics and scenario modeling. But you can also use accounting software, such as QuickBooks or Xero (which often include forecasting features). Increasingly, AI and machine learning can be used to provide data-driven insights into future trends, though we’d be remiss not to warn about some AI programs’ tendency to provide incorrect or misleading outputs (known as “hallucinations”).
6. Update Forecasts Regularly
Financial forecasts shouldn’t be a once-a-year exercise. Regular updates keep your projections relevant and useful.
For instance, quarterly reviews give you a chance to adjust forecasts based on more recent performance and new data. And you may want to keep a more constant eye on KPIs, such as revenue growth, profit margins and customer acquisitions costs, to identify deviations early.
Forecasts are just that — forecasts. Be willing to revise your assumptions as conditions change.
7. Get Expert Forecasting Help
One of the best things you can do to ensure your financial forecasts are up to snuff is to turn to professionals who are skilled in building these outlooks.
McManamon & Co. offers a wide variety of professional services, including budgeting and forecasting for small and midsized businesses. And by letting us focus on your finances, you can spend more of your time and resources focusing on your clients.
Start the new year on the right foot. Call us at 440.892.8900 or contact us online today.
Tags: financing, McManamon, small business, small business finances | Posted in McManamon & Co., small business, Small business finances