Business owners or financial officers know the value of accurate forecasts. Whether the objective is determining revenue for the month, the year or the next few years, a company’s revenue forecast, for example, often impacts or dictates spending levels, hiring, sales promotions and a million other business decisions.
If the forecasts driving those decisions are faulty, how can the forecaster expect positive results from the compounded decisions?
Below are five recommendations that forecasters should bear in mind when preparing forecasts and reviewing their efficacy.
1. First, start with reasonable expectations, as the “perfect” forecast is unachievable. In a revenue forecast, it’s highly unlikely in even the most controlled of environments to predict each transaction and its timing. But even though a forecast maybe imperfect, it can still be effective.
2. Do your homework. Whenever it’s available use the data at your disposal to map out trends that have already occurred. In some cases, trends may be obvious (like the uptick frozen yogurt stores have during summer), but even subtle trends (like more people come to your restaurant on Tuesdays than Wednesdays) can be born from a quick perusal of point of sale systems or bookkeeping programs. Often times these reports are canned in the system; it’s just a matter of taking the time to review the thoroughly, looking for even small trends that could improve the accuracy of your forecasts.
3. If you are using benchmarks to assess your forecasting performance, don’t trust the benchmarks blindly. Larger organizations set goals around the performance of their forecasts and set these goals based on “industry averages” or best-in-class performers. Like all benchmarks, however, forecasting benchmarks must be audited: is the source of the data credible, are the benchmarks reported using the same time frame (day, week, month) as your data, and are the metrics even the same?
4. When you have access to a software or program that does a reasonable job of forecasting, put some trust in these forecasts so that management time can be spent on other projects that add value to the company. It’s likely their time and attention are demanded elsewhere.
For accounting firms that take on business consulting engagements and for financially savvy business owners, Sageworks offers a financial forecasting solution as part of the ProfitCents suite.