No one knows your business better than you, but that can be a double-edged sword when it comes to forecasting your company’s future performance. Relying on your personal knowledge of the marketplace, your customers and your staff’s capabilities can lead to overly optimistic projections. Adding some quantitative methods for forecasting revenues and expenses can help you put together a more objective picture.
Quantitative forecasting methods rely on numbers, rather than expertise. Qualitative forecasts rely on projections that include intuition, experience and feedback from external stakeholders, such as suppliers and customers. With quantitative forecasting, a small business can look at its revenues for the past three years, and look at its numbers by quarters to spot seasonal patterns. Quantitative forecasting helps you adjust numbers by giving more weight to recent data, allowing a company spot trends that might provide better forecasts.
Small business owners might be tempted to treat past poor performance as an anomaly or attribute it to a subjective factor that will no longer exist going forward. Using objective, quantifiable historical data, you can create sales, revenue or expense projections based on your history as one tool when creating your final forecasts. This might provide a worst-case scenario, allowing you to plan for how you'll address if it happens.
Adding quantitative forecasting tools helps temper enthusiasm or flat-out falsified numbers from employees nervous about not showing positive numbers for their performance areas. Even armed with consistent, subjective information gathered from customers, suppliers and your key managers, you might rely too heavily on this qualitative research if you don’t temper or balance it with quantitative data.
When you put data into computer programs, even something as simple as an Excel spreadsheet, you can find patterns that help you make more accurate projections. You can analyze expense and revenue data by date, areas of your company, customer or vendor. For example, you might find that sales from your top product rose last year, but not as much as in previous years. This might be a sign that you’ve saturated your marketplace and shouldn’t expect increased sales of this product next year. You might find that your production costs have decreased during the past month after you added a new machine, letting you give more weight to these figures in your forecasts.
If you are looking to get a loan, find an investor, secure credit, add a partner or sell your business, the more objective your numbers, the more likely you are to get what you need. If you show hard numbers based on data, potential partners will feel more comfortable with your forecasts than if you make your pitch with rationales such as, “we surveyed our customers,” or “based on our sales reps’ projections,” or “our experience tell us that.”