Three things to consider when forecasting your finances as a small business owner
Forecasting is the act of looking at past and present financial data to predict future costs, expenses, and profits. Small businesses do this to tailor their business model more effectively.
Forecasting allows you to determine how much you will need to spend, save, and earn to maintain a successful business.
A good accountant can help you formulate your forecasts but, in the meantime, here are some considerations for forecasting your finances more effectively.
The two categories of forecasting
Both categories of forecasting have their uses. Qualitative forecasting is generally used for very long-term forecasts whereas quantitative forecasting can provide predictions on shorter timeframes.
- Qualitative forecasting involves predictions made by an individual without the use of previous data or figures. This is done largely on the intuition of the individual. Generally, the best person to do this is a professional accountant who has expert knowledge about market trends.
- Quantitative forecasting is the act of using measurable data to produce a forecast. It is a common way of developing short-time forecasts because in the long-run extreme events sometimes occur. To develop a forecast this way, you measure sales against past performance and other financial statistics.
The types of data measurable for forecasting
The data available to small business owners, to produce their forecasts, is varying. Some even claim that, when making forecasts based on qualitative data, feelings and emotions of previous customers is a relevant consideration.
Others prefer to use more statistical data points to predict the future of a business’ finances. These numerical data points include cash flow, profits, sales, expenses, etc.
An accountant can help you determine which data is relevant to your forecasting needs. They can also collate this data into useful analysis to produce more accurate predictions.
The types of forecasting useful for small businesses
There are numerous types of forecasts that can be useful for small business owners. Some of these include:
- Cash flow: A prediction of how much money you will receive and how much you will pay out, within a set period. This is essential for planning your operations efficiently.
- Sales forecast: Forecasting your future sales by reflecting on the past allows you to predict how much stock to buy.
- Demand Forecasting: This is a prediction about demand for your product in the future.
- Expenses forecasting: Defining your future expenses will reduce sudden surprises and help smooth your business’ financial performance.
How an accountant can help
As we have seen, predicting the future is a naturally complicated endeavour. As such, having a professional on your side is always a good option.
Assistance from a long-standing and reputable accountant can help to significantly smooth over the process of financial forecasting for your small business.
To hear more about how we can assist you in your forecasting needs, get in touch.