Business Forecasting: Strategies, Types, and Key Insights for 2024

Published in Home Modifications on February 20, 2024

By Barry Thwaits, SVP, Business Development, VGM & Associates

Definition of Forecasting

Business forecasting by definition is the process of making informed guesses about key trends and metrics within your business. Most of us look at forecasting as a burden or a necessary exercise that we need to engage in at the beginning of each fiscal year. However, we should see forecasting as a wonderful way to measure our current productivity against past efforts and even market trends. It is also an essential component of our strategic planning. In our current environment, with the challenges we face in billing, staffing and product availability, and ultimately the sustainability of our businesses, forecasting can be a great tool to help us manage those challenges.

Forecasting vs. Budgeting

As a starting point, let’s make sure we understand the difference between forecasting and budgeting. A forecast projects the financial future of the business, while a budget guides how to allocate cash. Our focus in this article will be how we can use forecasting to help us improve our efficiency and profitability in our business in 2024.

Types of Forecasting

Another topic we need to discuss before digging into forecasting is to understand the two types of forecasting. One is qualitative forecasting, which is making predictions without being able to measure them against previous outcomes. We most often see this type of forecasting used with new business startups, where there is no past history, or even similar markets to use as benchmarks for your plan.

The second option is quantitative forecasting, which measures your plan against past performance. This is the most informative option, as you can see whether the performance of your business meets or exceeds historic production. For our purposes today, we will focus mostly on quantitative forecasting. 

Why Do We Forecast?

One of the most important reasons we must put together a business forecast is to provide our organization a playbook for our financial planning. A well-executed forecast helps us define our sales goals, what our inventory levels should be, and what our targeted profitability should be. When we start to see downturns or upturns from our forecast, we can take the necessary actions to get our organization back on track. Any growing business needs a great strategic plan, and forecasting allows us to determine whether or not we are on track.

The next reason we must forecast is to encourage collaboration between the different divisions, or departments, of an organization. These divisions are typically sales, marketing, procurement, and billing in our industry. As an example, an accurate procurement plan for what should be acquired is dependent on the forecast coming from sales. Additionally, what we determine is our best price, or contract offering, is based on a forecast of what percentage of our business will be attributed to each of our contracts and referral sources. These collaborations are essential for a business working together to achieve its goals.

Unfortunately, too many organizations develop their forecast in silos, and the departments do not share or communicate their plans with their counterparts. Forecasting encourages all departments to get on the same page, understand their role, and execute common goals. Since forecasts are data-driven, there are fewer decisions made on gut feelings.

Forecasting also allows us to see growth opportunities and potential downturns. When a channel of our business is trending up or down from the original projection, a forecast allows a business to recognize this very quickly. Many of our VGM members have been challenged in recent times with how they serve their referral sources with limited inventory. Demand can be reprojected, ensuring that adjustments, such as inventory or pricing, can be made to maximize profitability.

Most organizations will focus their forecasting efforts on their sales and marketing functions. However, procurement and inventory levels also need to be an essential part of our forecasting efforts. An organization should take the time to map out their inventory needs based on their forecasted growth. One of the biggest mistakes we often see is an organization that has a great plan for growth without a plan for increasing inventory to match that forecast. This leads to a scramble to obtain inventory to meet increased demand, often leading to higher prices.

Unfortunately, a bad inventory plan can lead to not meeting the demand for new contracts or new referrals. On the other hand, businesses can save money when they can adjust forecasting and project the inventory they will need and when they will need it, thus not having to hold excess inventory. This will give businesses better cash flow, often enabling them to buy more of the items that are trending above projections.

Finally, well-defined and well-planned forecasts provide a road map where companies can see changes to their marketplace quickly. Valuable insights can be gained, giving companies an edge over the competition.

Potential Criticisms and Challenges with Forecasting

The data can be old and unreliable. Historical data from previous years’ production is all we have, and unfortunately it does not consider current trends and challenges. That’s why we must continually update our forecasts based on real-time events. It is incredibly difficult, frankly impossible, to predict unexpected events and downturns that may come from economic challenges or changes in reimbursement. The best we can do is analyze outcomes continually and adjust our forecasting as needed. Bottom line, we cannot become too dependent on what we did last year or last quarter.

We see this most often in the world of manufacturing. The manufacturer will tend to align production based on what has happened in previous years, without considering an updated sales forecast. This leads to being overloaded with inventory or unable to meet the demands of key customers. The key is to continually review and challenge the forecast based on current information and communication with all stakeholders.

Different Types of Forecasting

Next, let us focus on some different types of forecasting that can help you with managing your business. Finally, we will offer some suggestions on what you will need to build your best forecasts for managing your businesses.

Forecasting Cash Flow – This is the one forecast that each of us have conducted multiple times. It is an essential part of managing the sustainability of our business. Cash flow forecasting means predicting how much money will come in and go out of your business over the planned period. The more accurate your cash flow forecast is, the smoother your business will run. Maintaining your cash flow forecast will enable you to plan your operations according to the money you will have or will not have.

Sales Forecast – Most of us are familiar with a sales forecast. For our purposes today, it more closely relates to the referrals we will receive from the contracts and referrals sources we currently manage. What is important about this forecast is understanding just how much this forecast, and its variability, will impact the entirety of our business. From our view, this forecast needs to be updated weekly and examined for trends. There is nothing worse than discovering too late that a referral source actually started reducing referrals to our business months in advance of losing that referral source completely. Additionally, it will provide the most important and relative information to our procurement team and instruct that team on what inventory levels need to be.

Startup Cost Forecasting – Used by new businesses, this forecast will help you determine how much money you will need to have on hand to enter a new channel or market. Each of our VGM member providers should take a deep dive into exactly what their costs will be for opening a new branch or exploring new markets.

Expenses – Unexpected or unplanned expenses can be a drain on any plan. When you have a good expense forecast, you can remove any surprises that might be upcoming.

Steps to Developing a Business Forecast in Your Organization

Project your revenue – Use the data you have on hand to help determine what your revenue will be. However, a great idea is to predict a loss as well as any gains. We all have unforeseen cancellations of agreements or changes in reimbursement. Begin each year’s forecast with a loss of business. Your forecast will help guide you to exploring how you will make up those losses in referrals and profitability.

Analyze your expenses – Plan out your year. If you plan on growing or expanding your business, what additional expenses will you incur? Many businesses make the mistake of not including an appropriate increase in their General and Administrative (G&A) expenses when they have added new contracts or expanded into new markets. One of the biggest challenges we have today is making sure we plan for increased payroll. We cannot afford to continue to lose good employees because we did not plan for the salary expense changes that our industry is experiencing.

Monitor your cash flow – As that old axiom says, “Cash is king.” A sustainable and profitable business requires a monthly review of your cash flow forecast. Days Sales Outstanding (DSOs) are the biggest culprit, so having your average DSOs built into your forecast and monitoring for any changes is critical.

Determine your time frame – Finally, what is the time frame you want to forecast? We have mentioned multiple times that we monitor some forecasts weekly and others monthly. Bottom line, you need to set those timelines and be vigilant to take the time to review and make appropriate changes.

Key Takeaways

• Forecasting can be our most valuable tool to understand the health of our business and instruct us where to focus. It guides us where and how to make informed business decisions.
• Sales and or referral forecasts must be understood to be informed guesses at best. A business owner needs to understand there are potential risks and challenges if we are too dependent on previous years’ data. Helpful hint: Plan on losing a percentage of your business each year. It will help you focus on where new business is coming from and where you need to focus your sales and marketing efforts.
• Quantitative forecasting provides us a history that gives us more confidence in our predictions and what we believe we will accomplish. You are your best teacher. Use your past years’ data to measure your improvements.

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This article was originally featured in the VGM Playbook: Forecasting 2024. To read the full article and more like this, download your copy of the playbook today! 

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