8 Steps to implement a successful forecast
Forecasting offers significant benefits for businesses such as cost savings and margin improvements. Yet fewer than 10% of business owners have a forecast in place. A forecast is an important foundation to understand where your business is heading. During times of uncertainty a forecast can come in place to help justify new expenses. Justification of expenses aims to drive value to your business by optimizing costs and not just revenue.
Analyzing your business needs and costs, while building around what is needed for the upcoming period will help you identify risks and opportunities. A forecast should be reviewed on a monthly basis. The major advantage is the flexibility of planning for the short term, focused operations, lower costs and more thought-through execution. Every business needs a forecast, but the process can be time consuming and sometimes business owners can get caught up in short-term planning.
8 Steps to implement a successful forecast:
1. Base – To have a well thought out forecast you need a base such as a budget or historical data to help identify trends and analyze the business.
2. Clear objective – Identify what you are trying to solve and what the end goal is.
3. Time and frequency – Consider how far in the future the forecast will go, 6 months, 12 months, etc. It is recommended to have a 12-month forecast. Consider what frequency it will be updated, weekly, monthly quarterly. There is no rule of thumb, a business should consider what is most appropriate for its circumstances.
4. Who must contribute – Identify areas and departments of the business which will be impacted and incorporate them in the process. Participants should be empowered to contribute and held accountable to achieving targeted performance.
5. Identify value-drivers – Value-drivers are key to determining what moves the needle and grows the business. Have a strategy and assess what dimensions of the business are most important to its success rather than focus on every line item in the chart of accounts.
6. Vet the data – Have clean data. Have an Accountant or Bookkeeper ascertain the quality of data sources and that the information feeding into the rolling forecast is correct. Make sure accounting knows of any methodology or allocations you are forecasting, so the data is consistent when looking at month-end results.
7. Have Scenarios – One of the key benefits of forecasts is consideration of an assortment of scenarios. Using scenarios, or ‘what-if’ analyses can develop a range of possible financial outcomes given a set of assumptions and key drivers. As new information becomes available or as assumptions change, a forecast can be easily updated, and new scenarios can be run.
8. Track Performance – Variances between actual performance and expected performance should be monitored and assessed. Seek to understand what occurred, why it occurred, and what should be done about it. This applies to performance failures and successes. Most importantly know your numbers, have metrics, track ratios and compare them against the industry.
The major advantage is the flexibility of planning for the short term, focused operations, lower costs and more thought-through execution. Every business needs a forecast, but the process can be time consuming and sometimes business owners can get caught up in short-term planning. Staying current and preparing for the possibilities of the future will position your business to make better informed decision.