What Is Forecasting In Business [& How A CFO Can Help You]
As a CFO consultant and professor, I am often asked by business leaders how they can improve their companies’ results or run their businesses more effectively. This often leads to a discussion about how to measure performance, plan for the future, and determine a good yardstick for success. This is where forecasting comes in. Forecasting in business is what organizations use to measure their success and predict their financial well-being at a certain future date. It is the process of using an organization’s historical financial data to make estimates that help predict future trends. This helps your organization plan robust budgets, anticipate upcoming expenses, and establish a more future-forward financial plan.
Business forecasting is usually made easier when you have an experienced professional at the helm of the analysis, like an experienced Chief Financial Officer (CFO) or VP of FP&A. They will have the knowledge and relevant experience to help you gain an accurate scope of your business’s financial health. This experience can pay big dividends and help businesses plan ahead to avoid difficult obstacles.
Let’s take a closer look at what forecasting in business is and how it can help you plan for the future.
Why Is Forecasting Within Your Business Important?
There are numerous advantages to forecasting that can help every business benefit, including:
- Learning from past mistakes: Those who don’t study past financial performance are doomed to repeat errors. Forecasting analyzes the past to understand what went wrong (and what went right).
- Gaining valuable insight: During your forecasting analysis, you’ll access past and current data pertaining to your performance. Once you have these insights, you can more easily make decisions that will help you improve your performance in the future.
- Decreasing overall costs: Forecasting helps you understand how to use your capital more effectively and efficiently. Therefore, you can decrease how much you have to spend to reach your goals.
- Improving cash flow visibility: Organizations are most effective when they can accurately assess how much money is flowing in and out of their accounts. A strong CFO will help a business have an accurate 13-week cash forecast at all times.
- Accelerating progress toward your goals: Of course, the most obvious benefit might be the speed at which you can meet your goals. Forecasting both properly defines what success looks like for you and outlines your path to reach it.
For these reasons, it’s crucial that you find a professional who knows what they’re doing.
Forecasting Is More Than Budgeting
Some businesses devolve their forecasting plan into simple budgets. While budgeting is certainly part of the forecasting process, it’s not the main reason for doing so—anyone can make a budget without going through forecasting.
While budgeting helps organizations understand how they will reach financial goals, forecasting actually helps you predict what those results will be. In addition, forecasting should not be considered a one time exercise but an ongoing exercise that refines itself and becomes more accurate over time.
What Are Different Methods Of Business Forecasting?
Although most companies know that business forecasting is important, one survey found only 13% think their forecasting is effective. There’s clearly a disconnect on how to actually perform a proper forecast. This can happen for a variety of reasons. In my experience companies that aren’t forecasting effectively do not iterate or utilize historic data to the fullest possible extent. While the purpose of a forecast isn’t to predict future performance with perfect accuracy it should help the business learn how to gain predictable results as the business evolves, grows, and changes.
There is more than one way to forecast; companies may choose to forecast for their sales performance or forecast to get a general idea of their business’s financial health. It’s essential to utilize a method that works for your purposes and makes sense for your business. Let’s take a look at six different business forecasting methods.
1. General Business Forecasting
General business forecasting is best used when you want to get an idea of what the business climate will look like by a certain time. You may look at details like:
- Current industry trends
- Technological advancements
- Environmental factors affecting your area of operation
2. Capital Forecasting
Capital forecasting helps predict cash flow estimates in your organization. This will help you better estimate how much available capital you will have and/or need by a certain date and may look at factors including:
- Current accounts receivable processes
- Current assets
- Monthly profits
- Capital Expenditures & Investments
- Debt Repayment
- Timing of recurring and one time cash inflow and outflows
3. Financial Forecasting
Financial forecasting builds on capital forecasting by establishing what you can do with your available capital. While you’ll take your cash flow into consideration, you may also analyze your current operating costs to see what can be improved upon.
4. Accounting Forecasting
Accounting forecasts help predict what your future costs will be. This usually involves looking at changes in the market prices of your suppliers and the cost trends of employee and customer acquisitions.
5. Sales Forecasting
Sales forecasts estimate future sales and anticipate the needs of your sales workforce. Some factors you may look at include:
- Past sales history
- Current product/service inventory
- Past salesperson performance
6. Demand Forecasting
Finally, demand forecasting can predict what your market’s demand will be at a future date. This type of forecasting is essential, as your predictions can also inform your sales forecast and capital forecast. For this type of forecast, you may look at:
- Buyer trends
- Materials shortages
- New product performance
Plan For The Future Today
With business forecasting, your organization can better plan for its future and take control of its financial health.
This whole process is made even easier when you have a CFO forecasting for your business. Find out more about what a CFO can do for your business, and how Amplēo can help.