What Is Business Forecasting?
Business forecasting is a projection of future business or industry developments based on patterns and trends. A small business financial forecast estimates future revenues and expenses by looking at past and present data.
Previously, financial forecasting was the province of major corporations with entire FP&A (financial planning and analysis) teams.
Now, with tools like Profit Frog, Main Street businesses can harness the power of financial forecasting and dynamic planning to steer their businesses toward maximum profitability in an uncertain economic environment.
Why Is Forecasting Important in Business?
A high-quality forecast for your business provides invaluable financial insight. Knowledge is power—especially when it is actionable. Forecasting involves the twin activities of profitability modeling and scenario planning, both of which help you dramatically mitigate risk and take proactive action to seize opportunities.
Less downside and more upside. Who doesn’t want that?
How Do Small Businesses Forecast Sales?
A sales forecast for small businesses should be focused on business profitability. While other forecasting tools overwhelm the average business owner with complexity, Profit Frog strips forecasting down to the basics. We help you model and predict future sales and profitability based on analyzing different potential scenarios and outcomes.
Instead of inundating you with features that are unnecessary for the average small business, we decided to focus on the most important aspect: profit. Profit Frog will help you understand what profit and loss (P&L) is, how to maximize profit, and how to minimize loss.
Use Profit Frog to navigate uncertainty and make sound business decisions.
What Are the Three Types of Forecasts?
The three main types of forecasting are:
- Long-term forecasting
- Medium-term forecasting
- Short-term forecasting
Long-term forecasts project out six months to five years, while the short-term forecasting process looks for financial insights applicable to the near future (the next few days or weeks). Medium-term forecasts are done for a period of one to six months out.
Profit Frog allows business owners to forecast from 1 to 12 months into the future, as we find this interval to be the most useful. Any shorter than 1 month is too short, and anything further out than 12 months is too long, given how rapidly conditions change.
Business Forecasting Methods
In traditional corporate forecasting, 4 primary methods are often used.
- Straight line forecasting: assumes a constant growth rate, uses historical data, involves minimal mathematical calculations. Overly simplistic for most business scenarios.
- Moving average forecasting: looks for a pattern in a data set to “smooth it out” and create a more nuanced model than the straight line forecast.
- Simple linear regression forecast: analyzes the relationship between two variables to predict future outcomes.
- Multiple linear regression forecast: analyzes the relationship between multiple variables to predict future trends and patterns. A more complex approach than the simple linear regression method.
Profit Frog simplifies forecasting for small businesses. We offer the following four options:
- Copy your past actuals into Profit Frog, then adjust COGS, sales, and other variables dynamically to generate future forecasts.
- Start with one of our five templates and modify variables to generate a forecast.
- Duplicate another forecast and modify variables to generate a different forecast.
- Start a forecast from scratch (labor-intensive)
You can generate as many different forecasts as you need and then compare them to generate your business plans.
What Is the Best Method to Forecast Sales?
When it comes to sales forecasting for small businesses, it’s important to focus on what is most crucial to the success of your business—profitability and costs—and look at them through a quantitative lens whenever possible.
You can model your profitability by examining your historical and current sales data (your revenue and expenses, including cost of goods sold). Profit Frog can be particularly helpful to forecast sales.
How Do You Create a Forecast Plan?
To create a forecast, Profit Frog will walk you through the process of inputting all necessary info, including revenue and expenses. Our forecast will encompass the following factors:
- the cost of goods sold needed to make your product or provide a service
- operating expenses needed to sell and maintain your product or service
- how much your product or service costs
- an estimate on how much you expect to sell in a certain time period (based on how much you sold previously)
A forecast must include these four data sets. If you neglect one, your forecast plan won’t reflect the reality of what’s likely to happen, making it difficult to plan for a future scenario.
What Are the Steps in Business Forecasting?
The six crucial steps in business forecasting are:
- Identify the issue or question you want an answer on
- Collect data
- Input data into Profit Frog with our easy step-by-step process
- Generate a forecast based on factors and scenarios of your choosing
- Generate additional forecasts based on alternative scenarios
- Form a business plan based on the forecasts generated and the likelihood of their occurrence
Profit Frog helps you identify a current issue you’re seeking to solve, aids you in collecting crucial data, and guides you to generate a forecast that aligns with your goals and also with the reality of your business, your competitive landscape, and the economic environment.
Business Forecasting Example
Here’s how financial forecasting and budgeting can help small businesses improve profitability.
Benny has been running his bakery for over two years now and has grown revenue to an average of $20,000 per month. He enjoys the simplicity of his business model and wants to keep his menu to donuts, coffee, bagels and specialty drinks.
However, he worries that his 10% profit margins put him at risk in a volatile economy.
After viewing the details of his revenue and product analytics in the Profit Frog Results dashboard, Benny realizes that there are a few focus areas that will allow him to increase his profits. He sees that coffee generates almost 50% of his revenue, which causes him to focus squarely on the costs of coffee beans.
Additionally, he sees in the Analytics dashboard that his specialty drinks are underperforming significantly, when they should be one of his biggest profit drivers. This illuminates another area of focus needed to increase profits.
Profit Frog illuminates 3 fundamental changes for Benny, which he models in Profit Frog to create a new business plan.
- Switching coffee suppliers. Benny finds a new coffee bean supplier offering volume pricing that is 30% cheaper than what he has been paying.
- Increasing prices on specialty drinks. Benny knows he could charge more for specialty drinks based on his local research, so he increases prices to match the market.
- Advertising. Benny isn’t doing any advertising, and decides to hire a Google Ads firm to drive local business to his bakery.
He models these three changes in a new business plan that he calls “Reduce Cost of Coffee Beans” and sees that he should be able to increase his profits by almost 50% by making these few fundamental changes.
Now that his new plan is in place, Benny just needs to track his progress each month to make sure his business stays on course to realize the new profit margins.
Profit Frog Specializes in Small Business Forecasting
Grand business ideas require an effective business strategy to succeed, and we’re here to help you with the latter. Profit Frog helps you analyze and plan your financials, model your profitability, and plan for future scenarios based on current data. Click here to try Profit Frog for free and plan for success.
FAQ on Small Business Forecasting
Is the cost of goods sold considered an expense?
Yes, the cost of goods sold is an expense, and can be written off as such for tax purposes. Essentially, the cost of goods sold includes any materials and labor used to create a product or deliver a service.
Therefore, your COGS will include all the costs necessary to create what you’re selling, but won’t include expenses needed to market or sell the product or service (operating expenses).
What are forecasting tools?
Forecasting tools are a way to do business forecasting using software. For example, accounting software is a forecasting tool used by accountants. When it comes to small business owners, Profit Frog has got you covered. We offer a small business forecasting tool that uses simple measures (profit and loss) to forecast your future success.
What are forecasting techniques?
Forecasting techniques are all the techniques used to do business forecasting, whether they be quantitative, qualitative, or causal. These techniques use data and expert opinion to predict future trends based on previous results.
By taking into account your historical financial statements, along with your current sales, revenue, and expenses, as well as expert opinion, forecasting techniques can help you grow your business finances in a secure and sustainable way using data-driven strategies.
How do you do a monthly sales forecast?
The best way to forecast your sales for next month is to compare them with a previous sales period.
If you own a new company, comparing the sales with those of last month could be ideal. However, if you’ve been in business for several years, it’s best to compare your sales with those of the same month last year (for example, comparing January 2022 with January 2021).
The formula you can use for a monthly sales forecast is:
Previous month’s sales x Velocity = Additional sales
After using this formula to determine your additional sales, you can get the forecasted sales for the next month by simply adding the additional sales to the previous month’s sales rate, like so:
Additional sales + Previous month’s sales = Forecasted sales for the following month
What is a pro forma statement?
A pro forma statement is a financial statement that leverages assumptions about future values and hypothetical data to project performance for a time period that has not yet occurred.
A pro forma balance sheet uses asset, liability, and equity data for future projections with the following formula:
This formula determines the projected value (assets) of your business based on your current liabilities and equity.
What is a cash flow statement?
A cash flow statement is a financial statement that provides data regarding all cash inflows a business gets as a result of ongoing operations and external investment sources. These financial statements are needed for a cash flow forecast.
Cash flow income statements detail all money flow, no matter if you received the money through your bank account, received business loans on your credit card, or got the money as an investment.
To learn more about cash flow and how it differs from profit and loss, check out our cash flow and P&L comparison.