While most entrepreneurs launch their businesses to bring much-loved or needed products and services to the world, far fewer start with a deep understanding of key financial management tools. Small business financial forecasting is one of these skills, and when you use it for your business, you’ll be able to plan more effectively and make informed decisions to support your small business growth.
In this overview of small business financial forecasting, you’ll learn what it is, how it can help your business, and strategies to implement it effectively. You’ll also find resources for more advanced techniques so that as your business and financial management skills grow, you can add to your knowledge base and build long-term success.
What is small business financial forecasting?
Small business financial forecasting helps you understand the overall financial health of your business by predicting future success based on past data. This process involves analyzing industry trends, market conditions, customer behavior, and other key factors, such as planned investments, to estimate future revenue, expenses, and growth potential.
The goal is for you to make better plans for capital or equipment needs, staffing, and other key areas. Financial forecasting is essential for a strong financial foundation, profitability, and growth, but it’s often overlooked when you’re busy managing the day-to-day business operations.
How is small business financial forecasting different from budgeting?
If you’re wondering if a financial forecast is the same as a budget, the short answer is no, although your financial forecast creates a more realistic and better budget for your business.
Think of it this way: If you create a personal budget each year, you’ll likely base it on your projected income and yearly expenses. What is sometimes forgotten is what you need to achieve your longer-term goals to save, invest, and grow your net worth. A financial forecast helps you create a better budget by factoring in additional income and expenses to optimize opportunities while reducing the negative impact of additional expenses and uncertainties.
For small businesses, financial forecasting allows you to consider areas that will impact your budgets and bottom lines. It also shows you how these changes could impact your revenue and expenses.
A financial forecast reflects bigger-picture considerations that can support you with:
- Major decisions: It makes you think and plan for big changes, such as staffing, equipment purchases, and business expansions.
- Financing needs: A financial forecast can identify if and when you’ll need to secure small business loans or a line of credit based on your plans.
- Cashflow-cycle management: With a financial forecast, you can anticipate potential upswings or downturns to optimize opportunities or make wise decisions if revenue dips are projected.
- Pricing strategy: Your financial forecast determines when to adjust your product or service prices over time to ensure profitability and competitiveness.
- Goal-setting and benchmarking: With clarity on your business’s financial future, you can evolve goals ahead of the curve and set realistic benchmarks to evaluate progress.
When you fully understand these aspects of your business, you’re better prepared to create a successful growth plan.
What are the financial forecasting methods?
Financial forecasting typically includes two methods:
- Quantitative: This method uses historical data and other numbers-based information.
- Qualitative: This method uses non-numbers-based information, such as customer feedback, staff suggestions, expert opinions, and informal market research.
Each provides insight, but when used together, these inputs can give you a deeper understanding of your business’s future opportunities and challenges.
How to create a financial forecast
For most small businesses, financial forecasts that look about 2-3 years ahead are often the most useful. This is long enough to support your plan well while not going so far out that you’re essentially guessing.
Existing businesses can use historical data, market research, and anecdotal inputs to inform your forecast. If your business is new, your forecast won’t have the benefit of historical data, but it’s still helpful for planning and financing purposes, especially as you make critical decisions during the early years. To create your financial forecast:
- Gather past financial statements, including your profit-and-loss statement, cash flow statement, and balance sheet. You’ll use the data from these to begin formulating insights. For new businesses, do your best to estimate the financial information for your business.
- List the potential economic, geographic, and market trends that could impact your business over the next 2-3 years. For each, make a note of what could happen and what the impact would be. Then, you’ll identify the best-, most likely-, and worst-case scenarios.
- With this information, create sales projections for the next 2-3 years based on the most likely scenario. It’s important to know that your goal is simply to create realistic projections – there’s no expectation that they must be perfect.
- Also using past data as the basis, create expense projections. Be sure to factor in any potential cost increases for things such as your cost of goods sold (COGS) or inventory, operational expenses like your lease or mortgage payment and staffing, and all other applicable expenses.
- Next, factor in any potential major changes you’re considering making. This can include expanding to another location, bringing on more staff, purchasing major equipment, expanding to new markets, or anything that moves you toward your goals. Add these costs to your forecast.
- Use this information to determine the best path forward and identify if and when you need additional financing from a small business loan, a line of credit, or investors. Be sure that any additional financing costs are reflected in your forecast.
From the bigger-picture analysis you gain from small business financial forecasting, you can make informed decisions about cash flow management, where to invest or to hold off, and when to secure the resources needed to achieve your goals.
What are the more advanced methods of financial forecasting?
Once you’ve got the basics of small business financial forecasting down, you may be interested in deepening your knowledge. You can find many resources online to help you learn strategies to further your analysis, including terms that you’ll see, like regression analysis, trend lines, and the Delphi method. These can give you additional insights to hone your plans as your business grows.
Pursuit helps small businesses get financing to strengthen and grow
Although learning financial management may seem intimidating at first, watching your passion evolve into a thriving business is one of the most satisfying aspects of business ownership.
When you need financing to make your dreams a reality, Pursuit can help. We offer more than 15 loans and a line of credit for small businesses in New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington. In addition, Pursuit’s Business Advisory Services offers expert consulting services in financial management, human resources, marketing, and more at no cost to Pursuit borrowers.
Contact us to learn more.
