18 November 2021
The way to approach financial forecasting will depend on your situation. Starting from scratch with no previous data to draw on will look very different to a business that has been trading for a year or more. However, there are some similarities, and regardless of where you’re starting, you’ll want to consider the best way of going about it and what tools to use.
This method, otherwise known as quantitative forecasting, relies on previous data and financial statements. It’s best to take the lowest point and calculate from there, although you can take an average figure of typical months if that makes sense for your business. You’ll be able to see patterns in sales and expenses from past data which makes the process a simple task, but don’t be lulled into just assuming that things will carry on as they are. It still takes critical thinking to understand the highs and lows of that data, why they happened, and get prepared to make the most of the good times and limit the bad.
Top down analysis, or qualitative forecasting, starts with assessing your market as a whole. Once you’ve established the market size, you can make an estimate of how much of a share your business can take over the coming months and years. By evaluating trends in the market you can be prepared to amplify your strengths and minimise your weaknesses.
It’s worth keeping in mind that top down forecasts tend to be less realistic than bottom up forecasts, although it tends to be faster and give a broader view of sales patterns. This comes down to the amount of real life information you have to hand. When done with accuracy as a priority, over optimism, it can still be effective, particularly for start ups or those introducing new products into the market. Given a choice, a combination of the two methods is ideal.
Developing your forecast with an expert can make all the difference, but having the right expert that understands your business is vital.
Once you’ve settled on your method of forecasting, you can decide on which tool to use. SMEs differ to large businesses in the sense that they are complex and not easily represented in standard reports. Bearing this in mind there are a few key features that you should look for when deciding on what type of tool or software to use for your business.
Your forecast should be able to reflect the time period that’s most relevant to your business. If you are scenario planning, then the immediate effects may seem positive, but could cost you down the line. You need to be able to see further than 12 months into the future, so your tool will ideally create a rolling forecast of up to five years.
Forecasts can hold a lot of information. If you’re going to engage with yours on a regular basis then it needs to work for you. The last thing you want is to be scrolling for hours or having to search out the right piece of information every time you log back on. Your forecasting tool should give you a clear and simple view of your cash flow report, balance sheet, and any other statement relevant to your business.
Customise, don’t over complicate
Taking a complex system like an SME and trying to reflect that on a spreadsheet or in a piece of existing software isn’t as simple as it seems. It can end up costing you time down the line, trying to tweak figures or update information constantly. If it doesn’t work for you, then you won’t use it. Having a bespoke tool should mean that you recognise your day to day in your forecast, and it’s merely there to help tell the story of your business. Make it work for you, not the other way around.
Forecasting isn’t easy for SME owners, which is why we created our own forecasting tool to support them. While we know what it takes to create a successful business, we spoke to other SME founders about their experiences with forecasting too. Understanding what barriers they faced in creating and maintaining a useful forecast helped us create a tool which actually serves complex SMEs instead of hindering them. It’s customisable and we are on hand to guide you from set up to stepping up.