Creating accurate, realistic forecasts will help keep your business on track. Whenever possible, base projections on reliable industry sources. Start with an accurate sense of where you are today.
Begin With Your Baseline
Accurate forecasting is built on an accurate base. Before you start forecasting your future revenue, expenses, net income, and profit margin, take stock of your current situation. Record your current fixed and variable expenses, your revenue, and our profit margin. Once you have this baseline, you’ll be able to build on it and make more accurate, realistic forecasts for sales, expenses, and net profits for the coming year and beyond.
Focus On Key Factors
When forecasting, focus on the most meaningful data.
- Begin by using only the most reliable sources.
- If making comparisons with other companies, focus on your true peers – companies in your industry, niche or specific market, and ideally companies of a similar size of with similar resources.
- Use historical data, including financial statements and trends over a reasonable period of time.
- Stay grounded and break down complex financial data into relevant, meaningful and manageable bits.
Build From the Bottom Up
When making forecasts, you could work from the top down or the bottom up. Top-down forecasts tend to include some wishful thinking and assumptions, such as your company should be able to capture a certain percentage share of a $1 billion market. That lacks the solid basis of bottom-up forecasts – or forecasts that are built on actual numbers that your business has achieved. These forecasts should be detailed and based on the specifics of your current situation. You can build from each department or product line’s sales forecasts and spending plans.
Use Good Tools and Be Thorough
Use good business forecasting software. The process can be quick and quite easy. Two popular ones are PlanGuru and QuickBooks. PlanGuru is a popular desktop forecasting program developed specifically for business analysis. QuickBooks includes both desktop software and web-based tools. It’s also helpful to do multiple scenarios – and the business software makes this easy. For example, consider a number of product price points, a variety of staffing levels, and any other variables that could help you plan effectively and accurately.