18 Apr 2023
6 min read

The art of business forecasting

A manager showing some business forecasting tools to his employees.
Quick summary

Business forecasting is vital for companies of all sizes. And the secret to accurate forecasting? Sccurate spend data. Explore how getting your hands on the right, most up-to-date spend data can help inform important decision making in your business.

Table of Contents

    Regardless of size, every organisation needs to look to the future. Your future plans and prospects will significantly impact your current strategies, and it's essential to forecast appropriately to make informed decisions, manage budgets, and build for long-term success.

    What is business forecasting?

    Business forecasting is the process of making educated estimations about the future of your business. It's essential to any business plan and can help you identify opportunities, manage risks, and make better decisions. You can create forecasts for any aspect of your business, including sales, costs, cash flow, profit margins, market share, and customer demand.

    Business forecasting allows you to:

    • Gain valuable insight into what might happen in the future so that you can prepare
    • Identify potential problems or opportunities before they arise, allowing you to take action before they become a crisis
    • Compare your forecasts with actual results to evaluate your performance and make improvements

    CFO tips and tricks: How to manage month-end close like a pro

    The importance of business forecasting

    Forecasting helps CFOs, finance managers, and other business leaders to consider the expected outcome of different courses of action and make better decisions. Forecasting can be used for many purposes, including:

    Planning: Forecasts can help plan for upcoming events like seasonal changes and holidays.

    Decision making: Forecasts can provide valuable insight into what might happen in the future if certain actions are taken.

    Budgeting: Forecasts provide a way to predict costs, including revenue and expenses.

    Risk management: If you know where your costs are coming from and how much they will change over time, it becomes easier to manage your risk when things go wrong.

    In addition, businesses use forecasting techniques such as scenario planning and trend analysis to make better future decisions.

    Key techniques of business forecasting

    Qualitative models

    The qualitative model is a simple forecast that uses judgment to predict future events. Qualitative models can forecast consumer behaviour, market trends, and supply and demand in the short term. These models are based on expert opinion or instinct and rely on human judgment. The results of these models will not be precise, but they can provide helpful insight into what may happen in the future.

    Quantitative models

    Quantitative models use mathematical formulas to predict future outcomes. Unlike qualitative models, quantitative models are precise and accurate because they use data from previous years to predict future results. The results from quantitative models can be used to determine probabilities of different outcomes occurring in certain situations. Quantitative models vary depending on whether they are based on past data or current information from current events happening in the present time.

    Types of business forecasts

    General business forecasting:
    This type of business forecast aims to figure out the overall market climate. Several types of businesses and industries use general business forecasts to determine the business climate for a future date.

    Financial forecasting:
    The goal of financial forecasting is to gain a clear understanding of your company's future. As part of the analysis, assets and liabilities are weighed, accounts payable and receivable are calculated, operating costs are assessed, and the capital structure and cash flow are assessed.

    Accounting forecasting:
    Based on past and present data, accounting forecasts estimate how much your business will spend on raw materials, inventory, man hours, utilities, rent, and insurance.

    Demand forecasting:
    As a business, you will want to use demand forecasts to predict what the market needs and wants, alongside a robust sales strategy to determine how your business can capitalise on those needs.

    Sales forecasting:
    Based on sales data, a sales forecast estimates future sales, whether overall or of a specific product or service. Forecasting sales allow you to plan for the future regarding labour, resources, cash flow, inventories, and investment capital.

    Capital forecasting:
    A capital forecast is based on projections for future assets and liabilities and expectations about the number of liquid funds available.

    Supply forecasting:
    Supply forecasting works with demand forecasting to ensure sufficient resources are available when needed.

    Sources of data for forecasting

    Primary sources

    Primary sources are those that collect data directly from customers and stakeholders to predict their behaviour in the future. They can be internal or external, but they’re still considered primary because they provide real-time information about customer behaviour. Primary sources include customer interviews, social media monitoring, surveys, focus groups, and customer reviews.

    Secondary sources

    These are secondary sources that provide data collected by other organisations or agencies. For example, if you want to forecast product sales in the next six months, you may look at sales figures of similar products sold in the past six months by another company.

    Business forecasting process

    Choose an issue to address
    The first step in the business forecasting process is choosing an issue you want to forecast. You should choose an issue that can be measured easily, such as sales volume, profit margin, etc. For example, if you want to forecast your revenue, then you might need to measure revenue by number of items sold or revenue per item sold etc.

    Create a data plan
    The next step after choosing an issue is creating a data plan which will help us collect relevant data for our forecasting process and ensure that we won’t miss any important information while collecting data from various sources like comprehensive historical data, internal documents, website analytics, etc.

    Pick a forecasting technique
    Once you've defined your needs and gathered the necessary data, it's time to decide which forecasting method is best for your business. You can choose which method will work best for you using your industry knowledge and best judgment.

    Analyse the data
    Once you've collected your data, it's time to analyse it. This is where you check for outliers and missing values, then calculate averages and trends over time. Your goal is to find patterns that will help you predict future performance with reasonable accuracy.

    Verify your findings
    After analysing the data and finding any trends or patterns, verify those findings by checking them against current conditions. Comparing them against historical performance metrics and other industry benchmarks related to similar companies in similar industries can help identify any inaccuracies in your forecast.

    Business forecasting methods

    The Naïve Approach

    The naïve approach is the simplest forecasting method. It is based on historical data and doesn't attempt to account for any changes that might affect future sales. The naïve approach assumes that past performance accurately predicts future performance.

    The naïve approach is most appropriate when only a few factors affect sales, and those factors don't change from year to year. For example, if a company sells a single product that doesn't change in quality or price, it can use the naïve approach because there are no factors affecting sales other than past sales.

    The Average Approach

    The average approach is also known as "the mean" or "the median" method. This method uses a weighted average of past performance to forecast future performance. The weighting depends on how long ago each piece of information was gathered, with more recent information being given more weight than older information.

    The average approach is most useful when you have a large amount of historical data with varying degrees of reliability (some pieces may be more reliable than others). If you want an idea of your sales next year but don't want to try out new methods or assumptions, this might be your best option.

    Time Series Analysis

    This method uses historical data to predict future patterns. It is useful when there are clear trends in the data, but it can be inaccurate if there are no clear trends or if too many variables affect the data.

    Market Research

    Market research involves collecting what customers think about current products and services. It can be done through surveys or focus groups, which allow companies to get customer feedback so they can improve their products and services based on consumer needs and wants.

    Delphi Method

    This method is used by experts in a particular field who will provide their prediction on what might happen next. It works well for industries with little or no data available for analysis.

    Benefits of integrating expense management software with business forecasting tools

    By combining expense management software with business forecasting tools, you can better view your company's financial health. Expense management software allows you to track your spending and create a budget tailored to your needs.

    Benefits of integrating expense management software with business forecasting tools:

    Improved accuracy of financial projections
    The ability to forecast expenses accurately helps companies improve their overall financial performance. This is especially true when it comes to budgeting for operating costs. Expense management software enables businesses to track and monitor spending in real time, providing up-to-date information on how much has been spent on each line item category during the year. Business forecasting tools can then use this data to generate forecasts based on actual results.

    Enhanced visibility into expenses and cash flow
    By integrating expense management software with business forecasting tools, you can better understand how your organisation's operating costs impact its cash flow position — at any point in time. This allows managers to make informed decisions about where they should focus their attention so that they don't run out of money before the month's or quarter's end.

    Reduction in errors and omissions
    The ability to better track expenses leads to fewer errors and omissions, which translates into more accurate forecasts. This is because the information provided by an expense management platform is more reliable than manual recording.

    Convenient expense tracking across multiple departments
    If you have multiple departments within your organisation that generate their own expenses, then it can be difficult for one person or department to track them effectively. This results in inefficient use of company funds and loss of money due to inaccurate expense reporting. A good expense management tool should allow you to track expenses across all departments (even all entities in a group) to see how they spend their money, which would’ve been impossible if managed separately.

    Efficient expense approval workflows
    Organisations often have multiple approval levels for expense reports, which can lead to unnecessary delays and bottlenecks in the reimbursement process. Integration with expense management software reduces these bottlenecks by enabling employees to submit their expenses directly from the mobile app or desktop application without going through a lengthy approval process at each step.

    Improved insight into non-recurring expenses
    These are the kind of infrequent expenses, such as legal fees or insurance premiums, which are not included in your regular budgeting process but still need to be accounted for in some way. Integrating your forecasting tool with an expense management solution enables you to forecast these costs accurately so that they don’t come as a surprise later on when they materialise unexpectedly.

    Final thoughts

    In today’s business environment, where competition is fierce, and it’s difficult to predict customer demand accurately, forecasting often plays a key role in running a successful business. Forecasting can help companies decide where to focus their resources and how to allocate their budgets for planning purposes.

    In addition, forecasts are used to determine how much inventory or other resources should be purchased, what projects should be started or stopped, and which products should be developed. Integrating expense management software with business forecasting tools can help businesses make more informed decisions about their finances by providing more accurate data that can help them forecast more accurately.

    Empower your business with the right software tools to increase visibility and accuracy to make the best financial decisions. Book a demo today.

    Trish Toovey - Content Director at Payhawk - The financial system of tomorrow
    Trish Toovey
    Senior Content Manager
    LinkedIn

    Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.

    See all articles by Trish →

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