The benefits of forecasting

Every business can benefit from a forecast model. Not only does it tell you what to expect both seasonality-wise and cash-wise, but it’s also an excellent benchmark for measuring your actual activity.

However, business owners are not always thinking of the complete picture.

Forecasting can be used as a useful warning tool for your business. Wouldn’t you like to know whether your business is on the verge of running out of money? Forecasting can tell you if, or even when, you could run out of money.

While it’s best to keep your original budget as is, it’s also best to reforecast at some point during the year.

Why you should keep the original budget

Your budget tells you what you initially thought your business was going to do concerning its performance. For this reason, we recommend that you keep your original budget just as it is to reference later.  

Changing the original budget doesn’t allow you to see any deficits you may have within your business. If you thought your company was going to do $10 million in sales at the beginning of the year and you find that by mid-year you’re not hitting your monthly goals, you need to find out why and then work toward improving those areas.

How forecasting benefits your company

Your budget is historical data; it’s what you thought the next year was going to be concerning your revenues and costs.  While it’s best to do a reforecast at some point during the year, that doesn’t mean it needs to be updated every month.

When forecasting, you need to account for various industry related things. For instance, if you own a manufacturing company, you need to think about:

    • When do you order materials?
    • When do you need to order inventory?
    • When will you need to buy equipment?
    • How much is labor going to increase to support the volume you will be doing?

Forecasting your budget is similar to budgeting your household: if you know that in five years you’re going to need a new car, you can start to plan for that. If you have a manufacturing business, you know a piece of equipment lasts six years and should include that in the forecast.

How reforecasting helps your business

The beginning of the year is typically when companies sit down and say ‘we want a 25 percent growth rate this year.’ When you are forecasting, it’s easy to assume that because you saw 25 percent growth the year before, you will do the same for the upcoming year. However, when you have a mature part of the market that’s at healthy growth, it’s growth percentage will not be as fast.  

Reforecasting revises the projected budget and is best to do every six months or once per quarter. The reforecast can be used when comparing to the actuals which help the business owners understand the difference between what was initially projected at the start of the year and compare that to the current performance of the business.

How an advisor can help

As the owner, you know your business better than anyone else. But it is difficult for any one person to remember or know it all. After all, two heads are better than one.

An advisor can provide the foundation that that business owner needs.

The owner may think of the equipment, but forget that they need to hire three more people in distribution. In the reforecast, an advisor will be able to help you account for things you had not initially thought to include. Taking into account payables, receivables, and cash flow, gives the owner a more realistic vision of what should be happening.

If your company needs assistance building an annual budget or reforecasting your current one, please contact us today.