While nobody can predict exactly what the future holds, forecasting is an essential activity for every business. It can help you determine everything from appropriate staffing levels to how to expand your business most opportunely, while providing measurable milestones for tracking your company’s performance.
During times of economic uncertainty, though, generating realistic forecasts is particularly important – and increasingly challenging. That’s when business owners need to stay closely involved with the numbers and in tune with both the macro- and microeconomic events that could impact their operations.
The good news is that you don’t need a crystal ball or an MBA to effectively forecast. You just need to be objective in your analyses and flexible with your goals. Then, follow these six best practices to prepare your business for whatever comes your way:
1. See the forest and the trees
Business Leadership Coach Don Scott suggests that the forest is the economy at large. Understanding what’s going on in the broader economy and how shifting trends could impact your business is critical to your planning. “You can’t forecast in a vacuum,” he says. “You have to have a sense of what the smart people in the world think is going on in the economy.”
According to Scott, because industries react to changing economic conditions differently, it’s important to understand which economic indicators will have the greatest impact on your business. For example, if you depend on imported goods, foreign currency fluctuations could have a greater effect on your margins than other factors. A softening economy could hurt a fine-dining restaurant more than a fast-food franchise. “Whatever your business and geographic reach, you need to identify potential changes in costs and demand,” he says. “And those must be reflected in your forecast.”
The trees are your customers. It’s important to stay close to your customers, especially during turbulent times, Scott suggests. Talk to them about what they are seeing in their industry, and
then let their anticipated demands guide your forecasting process. “Your customers can be your best intel,” he adds.
2. Keep it real
Nicholas Sinigaglia, chief accounting officer for OnDeck, an online business lender, believes that optimism and enthusiasm are hallmark characteristics of entrepreneurs. But those same traits can wreak havoc on a business plan, forecast, or budget. “A positive attitude is important with a business, but you have to be realistic,” Sinigaglia says. “That’s why we say, ‘Hope for the best, but plan for the worst.’”
Say you’re a retailer and you’re forecasting a 20% increase in holiday sales over last year. You might decide that you need to beef up advertising and inventory to meet those rosy projections. But what happens if those projections turn out to be too aggressive? “If you’ve dumped all of your cash into that super-optimistic forecast, you may find yourself strapped for cash,” said Sinigaglia..
A better option might be to plan for 10% growth. “But speak with your vendors about making plans, should sales exceed expectations,” he says.
3. Look at both sides of the income statement
Too often small business owners plug in a forecast of, say, 5% year-over-year growth and don’t go any further, Sinigaglia notes. But focusing on revenue isn’t enough.
There are two parts to the income statement, so it’s important to project both income and expenses. “There’s only one pool of cash,” he says. “So, if you don’t plan and forecast both sides of those equations, you can do well on sales but still struggle because you didn’t forecast expenses properly.”
4. Monitor your progress
While you don’t want to react to every blip on the balance sheet or income statement, you need to regularly measure your progress against your forecasts. Sinigaglia recommends identifying the key performance indicators (KPIs) for your business and creating a dashboard that allows you to monitor those numbers more frequently during periods of economic uncertainty.
Again, KPIs differ based on your industry, but core metrics include sales, revenue, and income. “Looking at your dashboard more frequently can help you react quickly to economic changes,” Sinigaglia states. “But that must be balanced against reacting rashly to every move.”
For example, if there’s a sharp drop in sales from one day to the next, that’s an important thing to know, but it doesn’t mean the sky is falling. It means that you need to watch those numbers more closely until you have enough information to make a better-informed decision. “The right KPIs provide insight into your operations,” Sinigaglia says. “It’s a quick way to take the pulse of the business and identify any weaknesses before they become a problem.”
5. Run multiple scenarios
Scott recommends running forecasts based on three different scenarios: protection, moderation, and expansion. “With all the economic analysis out there and all the diligent work we do to create our models, they are still nothing more than models, and we know that not everything we forecast is going to happen,” he says.
But when you’ve prepared for the foreseeable contingencies, you’re better positioned to take advantage of opportunities and still prepared to weather any downturns. “If I’m going to make decisions based on my expansion case, I darn sure better have given due consideration to the protection case,” he says. “The art is finding that right space in between.”
6. Make adjustments as necessary
Once you’ve identified your KPIs and run your forecasts, you should develop a list of levers you can pull if you aren’t meeting expectations, Sinigaglia explains. For example, if your gross margin is still very strong but you’re coming up light on sales, what are your levers for increasing revenue?
You could have a sale to boost volume, but if you drop prices, what will that do to margins, gross revenue, and expenses? Maybe you need to pull back on the marketing lever to keep profit margins up. “You can’t account for everything, but you should have some basic ideas around ‘if this, then that,’” he says. “You should always have a Plan B.”
