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The Importance of 2017 Forecasting

 
 

When planning for the coming year, business owners face a number of unknowns: What conditions will affect your revenue and cash flow? How should you allocate your resources? Which goals should take priority? Fluctuations in the economy, your industry, and your local market can make it difficult to predict your performance. But knowing the fundamentals of forecasting can help you see the bigger picture, set realistic expectations, and make better-informed decisions as you move forward.    


More than guesswork

An effective forecast is more than guesswork – it’s realistic assumptions and careful analysis. For example, if you’re forecasting the first-year revenue from a new service line, you won’t have any existing revenue data to draw from. Instead, you can look for comparable situations: Consider how another service line performed in its first year, research the performance of similar-sized competitors, or look at the market demand for your new offering. Adjusting your forecast over time can help you identify which types of information are most helpful.


Weighing revenue and expenses

As you develop and fine-tune your forecast, be sure to address these three, interconnected areas:

  • Sales: Depending on your industry, sales activity may depend on your number of sales reps, number of qualified leads, promotional efforts, expectations for distributors, inventory in retail stores, and seasonal trends that affect demand.
  • Costs: Consider how sales activity influences your costs. For product-based businesses, look at costs such as stocking fees, administrative costs, co-promotion fees, and economies of scale that affect your production cost per unit.
  • Business expenses: Your forecast should anticipate recurring expenses related to your staff size, payroll and benefits, facility and equipment costs, and marketing expenses.


Benefits of forecasting

A practical business forecast can give you a clearer picture of your needs, opportunities, and risks. This information can help you to:

  • Control expenses: Looking at expenses over a longer timeline can help you determine the best time for a new hire or business purchase and can show you opportunities to trim costs.
  • Project cash flow: Your forecast can help you manage your cash reserves and understand your outside financing needs. This information can also educate prospective investors or lenders.
  • Identify areas for improvement: When your forecast falls short, this can be an opportunity to identify and address a part of your business that’s underperforming.


Once you’ve developed your forecast, consult it often and adjust your projections as circumstances change. By taking time to learn why some predictions proved correct and others did not, you can learn ways to improve the accuracy of each forecast.   


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The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.