How Business Forecasting Works and Why You Should Use It
As you grow your small business, you need to plan and develop your long-term strategy. Well-run companies don’t just address things as they come up, they plan ahead. As a small business owner, it’s important to keep sight of the bigger picture through business forecasting.
With business forecasting, companies use different methods and data to predict market trends to help determine their short-term and long-term business outlook. This data is a vital part of helping companies grow, start new initiatives, and plan their finances for the quarter and year. It can also help you plan for potential seasonal dips in your cash flow or plan for future expansions.
Keep reading to find out more about the different types of and elements that make up business forecasting as well as why every small business should consider using forecasting methods.
What Is Business Forecasting?
Business forecasting is making informed predictions about business metrics. That can include specific aspects of a business, such as launching a new product, or cover the company as a whole. Often, financial, operational, and business decisions will be based on these forecasting techniques.
While no one can predict the future, business forecasting methods can help even small businesses develop strategies. With business forecasting, historical data is collected and analyzed to find potential patterns. Today, most forecasting includes some form of technology, such as artificial intelligence, to help develop models.
Why Should You Use Business Forecasting?
Business forecasts can be used for budgeting, expanding your business, figuring out where to allocate funding, making decisions about cash flow, and helping create timelines for business operations, such as new initiatives. It helps companies make decisions based on data rather than on intuition and opinion.
For example, forecasting can be used to figure out how much pressure competition will put on your business, measure the demand for a product, help allocate resources, and forecast earnings.
Small business owners can use business forecasting to identify weaknesses in their long-term plans, come up with a plan of action for the future growth of the company, and adapt to changes in the economy.
Types of Business Forecasting
There are a few methods to conduct business forecasting and planning. Most are either qualitative (which uses non-numerical data such as market reports and surveys) or quantitative (meaning they use mathematical and statistical modeling).
Qualitative Models
Qualitative forecasting models are usually used for short-term forecasting. They tend to rely more on opinions and trends rather than measurable data. This type of analysis is more expert-driven but can be limited to longer-term projections.
Some of the common qualitative models for business forecasting include:
Market research: Market research is a business forecasting technique that uses polling and surveying large numbers of prospective customers to collect information. This might be on the specific brand or product or about the company as a whole. Market research can be used to predict if customers will buy more or less of a specific product in the foreseeable future.
Delphi method: With the delphi method of analysis, experts are polled about specific topics. This usually includes a panel where the experts are presented with a questionnaire in a few rounds. After each round, the experts can adjust their responses based on the aggregate answers of all respondents. The opinions are then compiled to help forecast future trends.
Quantitative Models
Quantitative methods use hard data and avoid opinions or polls from people. Instead, these techniques focus solely on numbers. Quantitative models are used to predict long-term trends and variables, such as sales forecasts.
Some of the most common quantitative forecasting include:
Time series methods: This forecasting model, also called a time series analysis, uses past data points to predict the future, excluding deviations. It’s also the most common method used by companies. To use a time series method though, you need to have access to a lot of historical data that shows clear and stable trends, otherwise, your forecasting models will be inaccurate.
Indicator approach: This methodology uses the relations between different types of indicators — for example, looking at gross domestic product and the unemployment rate. It will look at the performance of the lagging indicators to try to measure the impact of business strategies.
Econometric modeling: With econometric modeling, you make several mathematical equations to test the consistency of datasets over time and measure the relationship between the different sets of data. This method is very math-heavy and can be used to predict changes in the economy and market conditions and the potential impact those changes could have on a company.
5 Steps of Business Forecasting
To get accurate forecasts in your business forecasting, you need to make sure the information you get is accurate. While each method uses different strategies, they generally each follow the same steps:
Identify your question or problem: First, you need to figure out what it is you want to know. What problem in your business are you trying to solve? For example, you might want to know if you can meet demand next quarter or calculate how much of a product you will sell over the year.
Gather data: Next, you need to figure out the data you have available to you. That can be anything from sales data, how long it takes you to produce products, demand forecasts, customer satisfaction forms, and more.
Choose your forecasting method: Once you have your data, you can decide which type of business forecasting analysis you want to use. The type of method you will choose will depend on what it is you’re trying to find out.
Make an estimate: Using the forecasting method chosen, you can start to make business predictions. This can help you estimate future business performance. Keep in mind that your forecasts are only as good as your data, so make sure you have the most accurate, updated data points.
Figure out any discrepancies: Look back at your predictions to determine if they were accurate. Keep track of your findings to help improve your forecasting models in the future. You can also consider using third-party business forecasting models and data to help create business predictions.
Grow Your Company With Accurate and Reliable Data
Business forecasting can help companies with their business planning and decision-making. Forecasting models help predict future trends and assist you in figuring out your operations and budgeting forecasts for the next year.
While there’s no crystal ball that can tell you exactly what will happen in the future, forecasting is the closest you can get to understanding the future. Of course, the more data you have, the easier it is to make accurate business forecasts.
If your financial models show that you might have a dip in your cash flow, make sure to plan ahead. With Backd, you can get access to a working capital advance of up to $2 million that can be used to bridge a seasonality gap or invest in equipment to expand your business.
You can also get a business line of credit so you have access to funds whenever you need them. Plus, you can apply in just minutes and your credit score won’t be affected.
Apply today and find out if you qualify in just 24 hours.
