Proper forecasting can mean millions of dollars for your business! We know, we’ve constructed them:

• At LuluLemon I constructed reports for the C-Suite that forecasted profitability of the product line based on actual costs as they became apparent and proposed mark-ups before it hit stores. Adjustments lead to $millions additional profits.
• For LIT Labs, Entreflow constructed detailed forecasts for all aspects of their pre-launch manufacturing business. By impressing bankers and investors with forecasts that weren’t just smooth growth curves, we were able to help secure over $1m in seed financing.
• Other clients have negotiated Series A/B raises and due diligence with confidence as a result of our financials.

For small and large businesses, forecasting is the ability to generate a reasonable and objective outlook on the future based on what you’re currently doing/planning. This is the only way to win investors and to course-correct on your business.

Prepare to have your mind blown with a little nuance about forecasts that you can impress your business colleagues with. 90% of people know they’re different but only 1% can define the difference between budgets and forecasts. Even accountants stumble on this one. So here goes:

A budget is your statement of your desired financial outcomes. It is not updated once set, but new budgets can be created with new planning.

A forecast is a best prediction of actual financial outcomes. It is updated as frequently as possible.

Budgets are commonly constructed yearly, but can be broken down monthly, or cover multiple years. Forecasts are typically projected forward over multiple periods. The time period doesn’t matter.

You read that right. Management of small businesses should not attempt to construct forecasts themselves – this would allow management’s own wishful/pessimistic thinking to creep into the assumptions and to be fed back to the management team. For any business, small or large, management needs objective insight into where things are likely going: “If you continue doing what you’re doing, the result will likely be x.” Get help with this. The best people to create and update the forecasts based on objective insights are management accountants and financial analysts.

• Make sure you have data to work with – do you have accurate historical financials?
• Decide how detailed you need your forecast to be.
• Decide on the key variables to predict – what are your biggest expenses? What are your biggest products? Are there any leading indicators that you can think of?
• State assumptions and create a model based on actual data.
  Run the model forward.
• Check the forward prediction for reasonability.

It’s that easy! Just kidding, this will take some time and brainwork. Especially if you don’t have historical financials (but it’s still possible using market research and industry averages). Please get in touch if you need help with the details.

Update your financial forecast as frequently as possible! As a business owner, you make decisions in your business every day, you need current information. Having said that, there’s a balance. You can’t spend all your resources updating forecasts.

Pro tip: if you close your books monthly, update your forecast at least monthly. If you don’t close your books at least monthly, start doing that. Now! Your forecasts should be constructed using real financial data from your financial systems and as soon as new numbers become available, should flow through into your forecasts, either using automation or with a simple copy-paste.

Do update the assumptions behind the model used to construct the forecasts, but not often. This will take a lot more time, so it makes sense to do this in time with your budget cycle – e.g. if you budget annually, then do post-analysis about the accuracy of your predictions at that time. This will inform both your budget and assumptions behind your forecasts.

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. ” –Evan Esar

Start by getting a professional management accountant (not a tax accountant) or financial analyst to review your financial data and systems. Having the data and systems ready will make the forecasting process a snap. If you don’t, this will be a drag, or impossible.

Consider apps and tools that plug into your accounting system and are built for forecasting. If you use a cloud accounting software, we can recommend some good tools. Excel is a powerful tool, but it may not be the best place to start.

Entreflow’s CFO services for startups include forecasting, financial planning and analysis. Our analysts and CFO’s have constructed forecasts for all kinds of businesses and are prepared to use them to help guide management decisions. Here are some more forecasting resources – enjoy!

• The Three Way Forecast
• Cash flow forecasting – a guide for small businesses
• Forecasting vs. Budgeting for Small Businesses