How to create a forecast
Learn how to forecast in less time than it takes to sing Bohemian Rhapsody.
The duration of your average pop song is 3 minutes and 30 seconds.
Admittedly, the Queen classic is a little longer, however this article will teach you what you need to know about business forecasting in about the same time.
Less if you can do the Fandango.
Starting a business requires a leap of faith. You can shorten that leap if you’re able to accurately predict how much money you’ll make and where your costs will come from (and when).
Forecasting is an estimate of future sales, expenses and profit. You should, at a bare minimum, create an annual forecast. Ideally, you’ll update your forecasts more regularly as your business grows and changes, so you can fine-tune your plans.
Just like the weather, a forecast helps you plan.
In the case of the weather, an accurate forecast will help you choose the right clothes to wear that day. In the case of your business, an accurate forecast will help you plan for upcoming business costs, while still making sure you turn a profit.
You can make forecasts for all your business activities, including things like sales and operations. These forecasts will help you perform these business tasks cost-effectively.
What to include in your forecast
When forecasting for a business you intend to set up, it helps to consider these four things:
1. Fixed costs
A good way to ease into forecasting is to guess what business expenses you’ll have.
Consider your fixed costs, such as rent, insurances, utilities and anything else that won’t be affected by your levels of productivity.
2. Variable costs
Next, calculate your variable costs. Those are costs that change as your business changes.
They include things like the cost of material and staff.
Once you’ve calculate your expenses, you can begin to estimate how much revenue your business will make.
To be on the safe side, it’s wise to consider both a best- and worst-case scenario, because the reality will usually fall somewhere in between.
From here, you’re able to calculate your Gross Margin, or the difference between your costs and your revenue. Then you can work out your Operating Profit, or how much money you’ve made once all costs (including tax) have been subtracted.
4. Cash flow
As attractive as the sound of cash flowing all over you is, its true meaning is somewhat less exciting.
Cash flow measures the amount of money coming into your business and going out of your business. It’s usually tracked over a monthly period.
Cash flow is important because you’ll want to make sure you’ve got enough in the business kitty to keep all your bills and suppliers – as well as yourself and your staff – paid.
Forecasting your cash flow helps you understand whether you can keep your business running. For example, if your customers are slow to pay, it could leave you in a shaky cash position if creditors come knocking on your door for payment.
Make cash flow forecasting a part of your overall forecast. Learn more about how to do that here.
Profit and loss reports
Another forecasting tool that many businesses use are profit and loss reports. These are a record of all the streams of money coming in to your business. Understanding where your money’s coming from – and when it’s coming – will help make your forecasts more accurate.
You can learn more about profit and loss reports here.
Top 3 takeaways
- A forecast helps you plan for your business’ financial needs.
- It contains fixed costs, variable costs, revenue and cash flow.
- You should forecast as regularly as possible, ideally a few times a year.
READ NEXT: Understanding cash flow