A forecast is a prediction of a company's future financial performance presented in numerical format, usually in the form of spreadsheets. When a company develops its business plan, it sets goals for the short and long term, and then creates strategies and action plans to bring about the achievement of the goals. Forecasting is a process of translating each of these strategies and action plans into numbers.
Business owners new to the forecasting process are sometimes intimidated by the practical aspects of using computer spreadsheet software such as Excel. To get started, all you really need to do is understand the keystrokes required to perform basic mathematical calculations -- adding, subtracting, multiplying and dividing. The first forecast you make will have simple formulas that combine these functions. Later on you can learn techniques such as macros that will allow you to do more-complex forecasting models.
What a Forecast Looks Like
Most companies do month-by-month forecasts for the upcoming year. Each month is shown in a column. Each revenue and expense line item is labeled on the rows down the left side of the spreadsheet. With a forecast profit and loss statement, the bottom line of the spreadsheet is pretax income -- the difference between total forecast revenues and expenses. This bottom line number is a prediction of how profitable the company will be. At minimum, this number should be positive, the exception being developmental stage companies that expect to lose money in the beginning.
The forecasting process starts with the creation of a revenue model -- a calculation that shows how revenues will be generated. In its simplest form, the calculation could be projected units sold for each of the company's products multiplied by the average price per unit. For a restaurant, the calculation could be number of diners each day multiplied by the average expenditure per person. To do an accurate forecast, the assumptions used must be based on real data you obtain about similar companies in the industry. Avoid the natural entrepreneurial tendency to be overly optimistic with your revenue forecast. A conservative forecast that is achievable is more useful than one in which the actual results are likely to fall well short of expectations.
Care must be taken to ensure every line-item expenditure for your type of business is included in the forecast. Again, these must be based on real numbers. Rent expense for office or manufacturing facilities, for example, should be based on average cost per square foot for space in the area where you plan to locate the company. Within most metropolitan areas, rental costs can vary widely across the city. Don't overlook routine smaller expenditures such as office supplies, property insurance or janitorial services. These categories, when added up, can amount to significant dollars.
How it Is Used
The forecast is often revised several times until the management team is satisfied that the end result is an accurate depiction of what is likely to happen. If the first draft of the forecast shows a significant loss, then either forecast expenses need to be cut or the revenue forecast needs to be increased. When actual financial results for the year become available, the business owner will look at how the company fared in comparison to forecast. This comparison, called variance analysis, helps the management team determine whether the company is on the proper course, or whether adjustments need to be made to marketing strategies or operating expenditures.
- "Financial Management 101: Get a Grip on Your Business Numbers"; Angie Mohr; 2007
About Budget Forecasting
Budget forecasting is an important tool for any business owner. Knowing where the company is going in the following year will help...
Fundamental Concepts of Managerial Economics
Managerial economics involves applying mathematical and statistical equations to help managers find the most optimal allocation of limited resources. Analysts analyze the...
How to Use Excel for Forecasting
Business forecasting has transformed from the art of common sense and educated guesses to the science of critical business planning. It is...
How to Forecast Sales with Excel
Forecasting is more of a science than an art with advent of computer programs that have the ability to accurately predict future...
How to Build a Profit and Loss Statement in Excel
A profit and loss statement, or P&L, shows a company’s revenues, expenses and profit or loss for an accounting period. Your profit...
How to Create a Financial Forecast for Business
Your business needs a solid forecast to attract investors, to secure a bank loan or even to launch a new marketing strategy....
How to Create a Cost Volume Profit Graph
A cost volume profit analysis chart (often called a break even chart), is a useful tool for businesses for two main reasons....
How to Calculate Sales Forecasting
Sales forecasting techniques use sales data from past years to predict a company's future performance. Sales forecasts allow companies to anticipate their...
How to Forecast Weather for Surfing
Forecasting the weather when learning how to surf is key, check online to find out weather and wave conditions and learn more...
Sales Forecasting Techniques
Small-business owners can forecast future sales using a mix of quantitative data and qualitative research. Analyzing past performance and discussing potential trends...