Strategic Business Forecasting

Having a forecast for your business is like having a flashlight in a cave – it saves you time, stress, and headaches. Best in class CFO’s use multiple business forecasting methods and models to reach their goals and avoid pitfalls. Smart financial forecasting for strategic growth will help you:

  • Plan cash and anticipate shortfall months or years in advance
  • Time your spending and investments to maximize profitability
  • Measure progress toward goals and analyze misses
  • Set the right expectations for management and investors

Do you know which business forecasting methods you should be using?

Essential Business Forecasting Methods

The three key tools of a small business forecast are:

  • A rolling 12-month forecast
  • A fixed 12-month budget
  • A monthly or quarterly budget vs. actual analysis

In addition, there are two business forecast methods for special circumstances:

The rolling 12-month business forecast

The most basic business forecast method projects a complete profit and loss, balance sheet, and statement of cash flows for the next 12 months. This model will vary for every business but will most likely include detailed schedules of the following:

  • Sales growth, marketing, and advertising strategy
  • Cost of goods sold unit economics
  • Employee headcount plan
  • Detailed operating expenses
  • Fixed asset schedule
  • Inventory schedule
  • Seasonality adjustment schedule

A good small business forecast will also include cash projections with detailed components on the statement of cash flows. (More on short-term cash forecasting later.)

The forecast model should be clean and well organized to avoid errors or missing data. Assumptions should be clearly stated and validated based on history or research. Lastly, the forecast should be easily updated with up-to-date history, allowing you to “roll” the forecast each month. This can be easily done in excel using dynamic sumif statements, named ranges, or ODBC connections to your bookkeeping software like QuickBooks Online.

Understand your Cash Position. Understand how cash will move over the next 12 months.

Sample Chart Showing Cash Position and Range

The 12-month budget

What is the difference between a forecast and a budget? A budget doesn’t get updated.

The small business budget is a fixed standard on which to measure your performance. Companies almost never hit their budget, but that’s not the point. The point of a budget is to set a plan for your small business so you can measure the impact of deviations from the plan (more on that in the next section.)

If your already have a good rolling 12-month business forecast, this can be the foundation for your 12-month budget. In addition to the standard forecasting updates, when budgeting, a CFO should:

  • Involve your department heads. It is important your team participates in budgeting, agree to the budget, and understands their group’s role in helping the company’s financial success.
  • Go deeper. Re-examine the basic business forecasting model to ensure it is still valid. Adapt the forecast and budget as appropriate.
  • Share the budget with stakeholders. Make sure managers, stockholders, the board of directors, and even staff see and understand the business budget. This creates alignment in your team and sets the right expectations.

Lastly, a best practice for business budgeting is to perform both bottom-up and top-down budgeting. Bottom-up budgeting means your department heads build individual budgets which roll up into a total business forecast. Top-down budgeting means you set the strategic business goals (e.g. hit $10M in sales) and align all department budgets to match. Good financial forecasting for strategic growth does both – aligning bottom-up and top-down in an iterative negotiation that ensures everyone is on the same page.

Budget your Strategy. Set detailed expectations to hit key milestones and company goals.

Sample Budget by Department Pie chart

Budget vs. actual analysis

Best in class small business forecasting analyzes actual results against the budget to understand deviations, whether favorable or otherwise. This process provides new insight and improves business forecasting methods.

A typical budget vs. actual analysis will have four columns:

Actual results

Budget results

Variance

Variance %

These columns may be repeated for year-to-date (YTD) or quarter to date (QTD) figures.

Your CFO should build a healthy discussion with your management team around this a budget vs. actual analysis. The discussion should be around why the variance occurred, whether it will continue to occur, and whether there should be any adjustments to tactics or strategies.

The 13-week cash forecast (short-term forecast model)

This business forecasting method is used in short-term “emergency” situations to manage cash shortfalls. Compared to the 12-month forecast it has meticulous detail on specific expenses, cash receipts, and payroll events. This forecast is a lot of work to maintain, so it is only used when needed to avoid disaster.

The multi-year pro forma

The pro forma is a business forecasting method used for major events such as business acquisition, mergers, or selling new equity investment. It has a much larger timeframe, usually 5-7 years but some can be as long as 25-50 years. Often pro formas are based on very little historical data, such as with a startup business. Other times the historical data needs to be drastically adjusted. For example, you may acquire a company and plan to consolidate locations, so historical expense data is not an accurate picture of the future.

Pro formas are a highly specialized type of small business forecasting. Many private equity investment groups employ an analyst who only performs pro forma work. To learn more about pro formas, please visit our pro forma page.

Have questions about corporate or small business forecasting?