Business forecasting

Forecasting and what it can do for your business

Forecasting is fundamental to all businesses, whatever the size. There are key times when you need to anticipate future developments, both short-term and longer-term. For example, when you set up your business, when you need financing and when working out how much you will earn.

Forecasts should not be one-off paper exercises, but a dynamic part of your business strategy. You should review your forecasts regularly and update them with actual results. That way you can see how things turned out compared to your forecast, and adjust your activity accordingly. This will enable you to:

  • keep tight control over your business
  • understand what's happening in your company
  • see what strategies are working and where things are going wrong
  • clarify your goals and objectives and use them to inform your budget
  • plan staff incentives to help you achieve your goals.

Short-term forecasting

Short-term forecasts can look at the next 12 months, the next six months or even the next month.

To prepare a short-term forecast look at:

  • Sales strategies: what are your sales, where do they come from, where are they going to come from during the period you are forecasting?
  • Operational strategies: what are your costs and overheads, what's going to happen to these over the period you are forecasting?

You'll also need to forecast:

  • Profit and loss accounts
  • Balance sheets and cashflow
  • Financing requirements in case you need to work with external finance providers or negotiate terms with customers/suppliers etc.

Each of these can have a huge impact on your ability to continue in business.

How often you review and update your short-term forecast will depend on what is happening in your business:

  • If things are stable, you'll probably want to review your forecast and compare it with results every three to six months
  • During a period of change, or if you are having cashflow problems, you might revisit your forecast monthly.

Long-term forecasting

Long-term forecasting looks at your company's strategy and figures over the next three to five years and is especially useful when:

  • You want to apply for finance - finance providers will want to see a long-term plan
  • You intend to make a major change in your business, eg. investing in new IT infrastructure, new manufacturing processes or launching new product lines
  • You have partners and shareholders - they will want to know where you plan to take the company in the long-term.

As well as taking into account all the things you would look at in short-term forecasting, long-term forecasting will include an element of brainstorming:

  • What's going to happen to your markets in the future?
  • What types of products will people be looking for?
  • How will shopping/buying habits change?

Feasibility studies

For decision-making to go ahead, any investment or major change in your business should be preceded by a feasibility study, both financial and non-financial. A feasibility study looks at:

Resources and capacity

  • How much more business do you want, or can you handle, in the next six months, 12 months or two years?
  • How many new customers can you satisfy with the resources available?
  • How much capacity will you have available?

A financial feasibility study details:

  • The proposed change
  • The cost of the change
  • The rewards of the change
  • Key assumptions and sensitivities.

How forecasts and budgets work together

Ideally, your long-term forecasts will inform your short-term forecasts, which will in turn inform your annual budget. Forecasting and monitoring will help you organise incentives for your staff - for example, if you set targets and they exceed them, you can reward them with bonuses. In this way, you can all work towards your company's ultimate goals.

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