Developing An Appropriate Forecasting Model To Control Where You’re Heading

Forecasting is a term commonly associated with weather. However, there’s a good reason the term is also applied to business finances. Forecasting has the same purpose in financials as it does with the weather. It helps predict what lies ahead so you can prepare yourself to weather the storm. When you can forecast revenue, you can monitor your operations and discover what is at the root of your sales triumphs and failures.

You can set goals, measure performance and have a roadmap based on informed predictions, so you remain strategic in your management decisions. As a result, you maximise profits and have a sense of where you are heading. Here we look at why it is important to develop an appropriate forecasting model to maintain control of your organisation’s success.

The Benefits of Forecasting for Future Revenue

Having an appropriate forecasting model is vital to your organisation’s success. It provides you with a tool that helps make predictions more accurate. It allows you to:-

• Plan More effectively:- when you forecast revenue expectations for the year, you can plan more effectively and have metrics to measure against your progress. You can identify issues sooner and adjust as required while also remaining more focused on the goals you have set;
• Business plan for investors/credit:- forecasting plays an important role when it comes to attracting investors or borrowings. It can align with market trends and show how your business is able to benefit from the industry. You can show past performance and future plans so that your organisation presents a lucrative prospect that people will be willing to invest in;
• Team building timing:- It is easy to make costly mistakes when it comes to planning for employee expansion. If you start to increase your workforce too soon, you may lose money by increasing overhead costs too quickly. Conversely, if you start too late, you might not service your customers in a timely manner and to a high standard. Forecasting shows you when it makes sense to invest in more team members, or on the flip side,  downsize your payroll.
• Efficiencies:- when you have a better handle on your revenue, you can become more effective at scheduling based on predicted and/or lost sales. For example, if your business experiences seasonal trends, then you know when to ramp up production and when to slow things down. This allows for better inventory management, meaning you don’t see working capital sitting on shelves. It provides you  with access to more cash when you need it;
• Proper pricing:- forecasting allows you to understand your profit margins so you can look for opportunities to improve your products or services. You can become more effective at pricing your offerings to remain competitive while covering your costs and making a profit;
• Effective cash flow and credit management:- understanding your cash flow allows you to plan accounts payable strategies while also looking at how your receivables are working. You can avoid late fees and improve your credit rating, which in turn provides access to the potential for growth and access to more capital;
• Analysis:- forecasting is the best way to look at the past, present, and future. It provides milestones you wish to meet. By looking back, you can compare your past performance to current performance and by looking forward, you can establish realistic goals. Through effective analysis, you can also improve your offering and make it more profitable. You can determine which products don’t contribute to gross profit while focusing on the low-margin products that have a more positive impact on your bottom line; and
• Strategic planning tool:- This ties into all the points above. It allows you to look at all of these factors and more to facilitate effective strategic planning. You can track your performance against your goals and decide when it makes the most sense to execute your plans and bring on new projects. You also can watch for expected increases in earnings that can be invested in the areas that make the most sense to support growth.

Simply put, forecasting provides a roadmap to help you meet your goals.

Spotting Risk and Opportunities

Forecasting is also about mitigating risk and improving your ability to spot opportunities. Further, it inadvertently offers insights into customer behaviour as you can watch sales more closely and understand what is bringing them to your business, or worse, what is scaring them away! These insights contribute to effective sales plans and goal setting in hand with a more robust marketing plan to help attract the right audience.

Forward Thinking Model

The appropriate forecasting model keeps your organisation looking forward, so you always know how cash flows in and predict when cash will flow out. Financial institutions help explain the flow of funds where multiple business structures are involved, so you always know ‘who is who in the zoo’ when it comes to your money. 

The problem with many organisations is they fail to think beyond the ‘cash in the bank now’ situation. Ideally, organisations are best placed when they continue to use their past performance to effectively forecast what is expected in the future. This contributes to sound working capital management that allows you, as the business owner, to sleep at night. Using different scenarios, you can set effective forecasts to determine when and how much cash you may need to weather any storm and rise to meet unforeseen events without breaking the bank.

Instead of thinking revenue forecasting is nothing more than budget allocation, it is important to recognise it for what it is. Forecasting is a strategic tool that provides insights for effective decision-making. By using the most effective forecasting model, you keep your numbers more accurate and boost your confidence in your decisions.

Bonitas Partners Pty Ltd’s cash flow and financial forecasting ensure you will never be flying blind when running your business. We can help put the appropriate forecasting model in place and provide the support you need to keep on top of your finances. We take a unique approach by asking all the right questions, so we are better equipped to think ahead to determine what you need.