A rainy day or contingency fund is essential for ensuring your business’s future. One of the best tools to help you build and plan that fund is business forecasting. Forecasting incorporates numbers, expert opinions, and market research data. If you want to learn more about the uses, benefits, and business forecasting methods, you can always read through additional resources like this guide from Divvy (https://getdivvy.com).
Before you check out additional guides, you may find it helpful to know the basics of business forecasts. Here is a beginner-friendly guide to predicting how your business will perform.
The purpose of business forecasting
Have you ever made a budget for your personal finances? Think about why you did that. It was probably so you wouldn’t overspend or because you wanted to create wiggle room to save for a significant purchase like a house, your kid’s college fund, or emergency savings.
The same principle applies to businesses, but the goals often extend beyond budgeting. Business forecasting helps companies project future growth and plan hiring events or other internal needs. For example, a company may use business forecasting when they want to launch a new product or decide to sunset another.
Forecasting models and methods help keep leaders informed and guide their choices. These choices can be short-term or more strategic, long-range decisions.
Quantitative forecasting
As you may have guessed, quantitative forecasting methods rely on numbers. Leaders often rely on quantitative methods to predict sales and demand. Managers may use prior or historical data to predict future sales and demand.
For example, suppose your business typically generates $1 million in sales during the first and second quarters. But in the third and fourth quarters, sales usually dip to $500,000. Using a naive or baseline approach, you can predict your first, and second-quarter sales will be no less than $1 million. And your third and fourth-quarter sales won’t fall under $500,000.
However, maybe you’ve only been in business for six months. In that case, you have less historical data to use. If you lack the history to make predictions, you can use the moving average approach to drive sales forecasts. The moving average takes monthly totals and then averages them to estimate the next month’s earnings.
Qualitative forecasting
The most significant difference with qualitative forecasting is that it moves beyond numbers. These methods don’t use numbers or math at all. Instead, qualitative forecasting relies on opinions and feedback that you usually can’t measure in figures.
Think about executives’ opinions, customer insights, and industry experts’ observations and predictions. You can use multiple sources to help shape your qualitative forecasting methods.
Internal opinions and insights from your executives can reveal current and upcoming challenges. Consumer survey responses might indicate opportunities you’d otherwise miss. Industry experts will show trends that’ll redefine how businesses operate.
These are things the numbers often can’t reveal. Just like tracking your personal spending might reveal higher grocery expenses, it can’t tell you why. It might be because of overspending, a change in food preferences, or inflation. Only once you consider both qualitative and quantitative factors can you make an informed decision.
Final thoughts
Using these beginner tips for learning how to create business forecasts, you can help securely plan for those commercial rainy days without worrying about financial struggles.