Business Forecasting Defined and What it Means for Your Revenue
Whether businesses are aware of it or not, they're already forecasting when they make decisions based on future scenarios.
Although, without the help of forecasting software to increase accuracy in data-driven projections, businesses are simply making decisions regarding future sales based on past experiences without considering additional factors.
What Is Forecasting in Business?
A business forecast is a data-driven prediction of a company's future financial situation. This allows managers and owners to make accurate predictions and appropriately respond to the needs of their operations by optimizing labor and inventory.
Through this process, companies will create a plan that helps them meet their business objectives to drive sales and profit. It should take into account past performances, coupled with the current economic conditions to predict future trends and produce projected sales and labor demand.
While this task can seem overwhelming for newcomers, knowing the basics of where to begin can set you on the right path to optimizing business processes.
Though techniques will vary for different business models and company sizes, the general process is as follows-
- It begins with a question often based on a problem related to sales or a specific data point. Questions to consider may include, What is the projected profit for the next 2 years? and How many monthly clients can we expect this current fiscal year?
- Theoretical variables are considered and the forecaster will choose the best mode of data collection and determine which information is relevant, such as the number of monthly clients in the past, with additional data points to predict different outcomes.
- The process is streamlined with the forecaster making educated estimates regarding future events.
- A forecasting model that is in line with the dataset, projections, and variables is chosen.
- The data is analyzed using the chosen type of forecasting method and a quantitative projection is made.
- The process is verified by comparing the forecast with actual figures to confirm its accuracy and adjust the model for the next quarter.
Forecasting and Business Success
When businesses don't have clear systems in place to monitor their spending habits, chances are their daily operation costs are exceeding the total revenue.
This will be exemplified by less efficiency and profit losses through over-staffing, over-manufacturing or over-stocking. Companies may also experience damage to their reputation among consumers for failing to meet the expected demand.
A business forecast can prevent this by allowing companies to foresee future trends and adjust their operations accordingly to stay ahead of the competition.
Qualitative vs. Quantitative
Generally speaking, there are two main methods of business forecasting- qualitative and quantitative.
The qualitative forecast is based on educated guesses and the opinions of those working within the industry, while the quantitative method uses past data from operations, bringing in numerical methods.
Choosing the right forecasting method would depend on the company's size as well as their specific needs or goals.
When a business does not have sufficient data to interpret, they'll need to employ a qualitative forecast. Small and new businesses find this method to be the most beneficial as this method of short-term forecasting relies on the opinions and insights of industry experts.
Qualitative forecasting methods are used for new businesses that have little-to-no historical data to use in predicting future direction. In these situations, a panel of industry experts would be chosen by the business to give their insight and help piece together an accurate prediction using the limited numerical information.
A qualitative method also helps small businesses reach short-term goals by measuring immediate responses to new product launches or other sales, which can be accomplished using consumer surveys. Generally speaking, this method will be a little more trial and error, as it gives small businesses an idea of which direction to go in, but does not work as a highly accurate forecast.
Quantitative forecasting is more suited for larger businesses or established companies, as it requires historical sales data, census statistics, and economic trends. A cause and effect relationship is established from the data, which gives insight into what actions might lead to certain outcomes.
When quantitative methods are used, businesses will be able to work towards longer-term goals by taking into account past data from a specific period of time. This provides more certainty in the forecast created.
It's Not Failsafe
An error or miscalculation in the forecast can have a ripple effect on businesses and their daily operations.
It can lead to losing profits through under or over-staffing, incorrect budgeting for manufacturing or services, and an overall loss of credibility if the business is not catering for the needs of the clientele.
To ensure efficient resource management, profit maximization and more, it's worth investing in sophisticated software to save time and resources, while eliminating the possibility of human errors and biases during the forecasting process.