Why is forecasting important?
The question ‘why is forecasting important?’ gets Googled over 100 times a month, with the search results full of articles about the obvious benefits of accurate forecasting.
The problem is, these articles don’t really help business owners understand exactly how their business can benefit, and most importantly, how they can forecast effectively.
Accurate forecasting can be difficult. There are lots of industries with many variables, often depending on seasonal data, so a forecast can never be completely accurate – as we all know, the seasons can be a law unto themselves!
But think about it this way; If you know what your short-term business goals are for the next financial year, then why can’t you make a hypothetical plan to see how you’re going to get there? After all, a forecast is just that.
How do I forecast?
A great starting point for forecasting is to revisit your business goals. If you want to grow your customer base to 200 customers by the end of the financial year, or you want to make £1 million – how much is each customer worth, or how many customers do you need to make that first million?
Once you know this, you can plan your fixed costs based on these goals. How much extra stock will you need for those additional customers, and how much will that cost your business? If you increase your customer base, will you need more staff, and how much will those people cost your business?
Forecasting is all about questions, and hypothetical scenarios. It doesn’t need to be absolutely accurate. If your business is gaining more customers than you forecasted, you’re probably not going to turn them away!
On the other hand, if you’re not quite keeping up with the figures you’ve forecasted, it will help you make plans to improve, or highlight areas in which you are overspending.
A forecast should always be evolving, too. Whilst your initial forecast might be done at the beginning of the financial year, you should revisit it to ensure the assumptions you’ve made still ring true to your business.
How do I forecast accurately?
We can forecast the exact time of sunrise tomorrow, and indefinitely into the future.
Why? Because our forecast is based on hundreds of years of data collection. And you can use this method to forecast for the coming year (or more) if your historical data is accurate and of good quality.
You won’t be able to forecast well if your bookkeeping records aren’t up to date, or if they’re just lines in a spreadsheet with the name of the supplier and an amount. This level of detail just isn’t enough.
To stick with the weather analogy – if a weather person forecasts a sunny day on the 1st May this year, because the 1st of May was sunny last year – well, it just doesn’t work like that.
A business forecast is a little like predicting the future, but instead of a crystal ball and basic assumptions, you use detailed data. This data helps you prepare for changes, become more profitable, and make good business decisions.
Highly accurate forecasting, whilst desirable, is rarely necessary. In fact, if your business processes NEED highly accurate forecasts to function properly, it’s likely they don’t function very well.
If forecasting can get you “in the right ballpark,” and thereby improve your decision making, it has demonstrated its value.
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