Forecasting is essential for your business and should not only be used to get you through the tough times.  It is part of your business lifestyle.  Therefore, you should always be forecasting – thinking about what will happen, assessing the likelihood of it happening, and what actually happened.

Planning for the future is a critical aspect of managing any organization, and small business enterprises are no exception. Indeed, with the limited capital resources afforded to small and medium sized business, planning becomes particularly important. In fact, according to the Small Business Administration, two of the top five reasons small businesses fail within the first five years is due to poor management and insufficient capital.

Creating a forecast and living by it means looking forward even as you focus on the present. The goal of forecasting is to come as close to your prediction as possible.  It is a business owner’s worst nightmare to have their expected and actual results be very dissimilar and not be able to explain the variances. Although in reality there will always be differences between actual and forecasted results, to minimize them as much as possible, understand the reasons behind them, and managing those differences is key.

For example, an unexpected rise in prices with your current vendors may occur.  Or an unexpected increase in sales may transpire and preparations to handle such fast growth were not considered.  On a more extreme level, unexpected shocks to the economy or a natural disaster may arise.

Despite the fact that forecasting is an imprecise art, you must do your best to plan for the future, and make sure the appropriate parties are held accountable for the accomplishments of the company’s goals.  The biggest challenge is connecting the best revenue drivers for your product or service.  Therefore, the model used to create the company forecast should be one that is particular to your business, its industry, the company’s marketing strategy, and logistics of getting the product or service to the customer.  It is crucial for you to establish a framework for translating forecasts into actionable insight and then into action.

Forecasting can be approached in a number of ways.  The best outcomes are usually the result of applying several methods. This process may involve the use of econometric models that can take into account the interactions between economic variables. In other cases, you may employ statistical techniques for analyzing various sets of historical data.  For small businesses there may be a more basic model of simply reviewing the prior year data and considering the marketing strategy planned.  With this, you will also include measurements of the success of your marketing strategy when you compare your actual to forecasted numbers.

Having your own business comes with many challenges and many roles that you have be efficient and effective at to give your company a fighting chance. Certainly building a firm forecast and keeping an eye on how the company does compared to that forecast, addressing all the “why” questions, is key to building a successful company. The only constant in running your business is change.  So be prepared.

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