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What Is Business Forecasting? Definition, Methods, and Model

What Is Business Forecasting?

Business forecasting involves making informed guesses about certain business metrics, regardless of whether they reflect the specifics of a business, such as sales growth, or predictions for the economy as a whole. Financial and operational decisions are made based on economic conditions and how the future looks, albeit uncertain.

Key Takeaways:

• Forecasting is valuable to businesses so that they can make informed business decisions.
• Financial forecasts are fundamentally informed guesses, and there are risks involved in relying on past data and methods that cannot include certain variables.
• Forecasting approaches include qualitative models and quantitative models.

Understanding Business Forecasting

Companies use forecasting to help them develop business strategies. Past data is collected and analyzed so that patterns can be found. Today, big data and artificial intelligence has transformed business forecasting methods. There are several different methods by which a business forecast is made. All the methods fall into one of two overarching approaches: qualitative and quantitative .

While there might be large variations on a practical level when it comes to business forecasting, on a conceptual level, most forecasts follow the same process:

• A problem or data point is chosen. This can be something like "will people buy a high-end coffee maker?" or "what will our sales be in March next year?"
• Theoretical variables and an ideal data set are chosen. This is where the forecaster identifies the relevant variables that need to be considered and decides how to collect the data.
• Assumption time. To cut down the time and data needed to make a forecast, the forecaster makes some explicit assumptions to simplify the process.
• A model is chosen. The forecaster picks the model that fits the dataset, selected variables, and assumptions.
• Analysis. Using the model, the data is analyzed, and a forecast is made from the analysis.
• Verification. The forecast is compared to what actually happens to identify problems, tweak some variables, or, in the rare case of an accurate forecast, pat themselves on the back.

Once the analysis has been verified, it must be condensed into an appropriate format to easily convey the results to stakeholders or decision-makers. Data visualization and presentation skills are helpful here.

Types of Business Forecasting

There are two key types of models used in business forecasting—qualitative and quantitative models.

Qualitative Models

Qualitative models have typically been successful with short-term predictions, where the scope of the forecast was limited. Qualitative forecasts can be thought of as expert-driven, in that they depend on market mavens or the market as a whole to weigh in with an informed consensus.

Qualitative models can be useful in predicting the short-term success of companies, products, and services, but they have limitations due to their reliance on opinion over measurable data. Qualitative models include:

• Market research : Polling a large number of people on a specific product or service to predict how many people will buy or use it once launched.
• Delphi method : Asking field experts for general opinions and then compiling them into a forecast.

Quantitative Models

Quantitative models discount the expert factor and try to remove the human element from the analysis. These approaches are concerned solely with data and avoid the fickleness of the people underlying the numbers. These approaches also try to predict where variables such as sales, gross domestic product , housing prices, and so on, will be in the long term, measured in months or years. Quantitative models include:

• The indicator approach : The indicator approach depends on the relationship between certain indicators, for example, GDP and the unemployment rate remaining relatively unchanged over time. By following the relationships and then following leading indicators, you can estimate the performance of the lagging indicators by using the leading indicator data.
• Econometric modeling : This is a more mathematically rigorous version of the indicator approach. Instead of assuming that relationships stay the same, econometric modeling tests the internal consistency of datasets over time and the significance or strength of the relationship between datasets. Econometric modeling is applied to create custom indicators for a more targeted approach. However, econometric models are more often used in academic fields to evaluate economic policies.
• Time series methods : Time series use past data to predict future events. The difference between the time series methodologies lies in the fine details, for example, giving more recent data more weight or discounting certain outlier points. By tracking what happened in the past, the forecaster hopes to get at least a better than average view of the future. This is one of the most common types of business forecasting because it is inexpensive and no better or worse than other methods.

Criticism of Forecasting

Forecasting can be dangerous. Forecasts become a focus for companies and governments mentally limiting their range of actions by presenting the short to long-term future as pre-determined. Moreover, forecasts can easily break down due to random elements that cannot be incorporated into a model, or they can be just plain wrong from the start.

But business forecasting is vital for businesses because it allows them to plan production, financing, and other strategies. However, there are three problems with relying on forecasts:

• The data is always going to be old. Historical data is all we have to go on, and there is no guarantee that the conditions in the past will continue in the future.
• It is impossible to factor in unique or unexpected events, or externalities . Assumptions are dangerous, such as the assumption that banks were properly screening borrowers prior to the subprime meltdown .  Black swan events have become more common as our reliance on forecasts has grown.
• Forecasts cannot integrate their own impact. By having forecasts, accurate or inaccurate, the actions of businesses are influenced by a factor that cannot be included as a variable. This is a conceptual knot. In a worst-case scenario, management becomes a slave to historical data and trends rather than worrying about what the business is doing now.

Negatives aside, business forecasting is here to stay. Appropriately used, forecasting allows businesses to plan ahead for their needs, raising their chances of staying competitive in the markets. That's one function of business forecasting that all investors can appreciate.

Kesh, Someswar and Raja, M.K. "Development of a Qualitative Reasoning Model for Financial Forecasting."  Information Management & Computer Security, vol. 13, no. 2, 2005, pp. 167-179.

Infiniti Research. " Business Forecasting: The Challenges in Knowing the Unknown ."

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Business Forecasting: Why You Need It & How to Do It

Table of Contents

What is business forecasting, the importance of business forecasting, business forecasting process, business forecasting methods, elements of business forecasting, sources of data for forecasting, business forecasting only goes so far, how projectmanager helps business forecasting.

Well-run organizations don’t fly by the seat of their pants; they’re constantly working on business forecasting and business planning. Every decision and every process is based on data obtained from business forecasting, business intelligence tools, market research and scenario planning. Companies focus their energies on ways to predict market trends to help them set successful long-term strategies.

Some business forecasts are based on highly sophisticated statistical methods while others are based on experience and past data. Others simply follow a gut feeling. One thing remains constant: all industries rely on business forecasting.

Business forecasting refers to the process of predicting future market conditions by using business intelligence tools and forecasting methods to analyze historical data.

Business forecasting can be either qualitative or quantitative. Quantitative business forecasting relies on subject matter experts and market research while quantitative business forecasting focuses only on data analysis.

You can access historical data with project management tools such as ProjectManager , project management software that delivers real-time data for more insightful business forecasting. Our live dashboard requires no setup and automatically captures six project metrics which are displayed in easy-to-read graphs and charts. Get a high-level view of your project for better business planning. Get started with ProjectManager for free today.

Quantitative Forecasting

Quantitative forecasting is applicable when there is accurate past data available to predict the probability of future events. This method pulls patterns from the data that allow for more probable outcomes. The data used in quantitative forecasting can include in-house data such as sales numbers and professionally gathered data such as census statistics. Generally, quantitative forecasting seeks to connect different variables in order to establish cause and effect relationships that can be exploited to benefit the business.

Qualitative Forecasting

Qualitative forecasting is based on the opinion and judgment of consumers and experts. This business forecasting method is useful if you have insufficient historical data to make any statistically relevant conclusions. In such cases, an expert can help piece together the known bits of data you do have to try to make a qualitative prediction from that known information.

Qualitative business forecasting is also useful when little is known about the future in your industry. Relying on historical data is useless if that data is not relevant to the uncharted future you are approaching. This can be the case in innovative industries, or if there’s a new constraint entering the market that has never occurred before such as new tax law.

Business forecasting is critical for businesses whenever the future is uncertain or whenever an important strategic business decision is being made. The more the business can focus on the probable outcome, the more success the organization has as it moves forward.

Here are the steps that a business forecaster should typically follow:

• Define the question or problem you need to solve with your business forecasting efforts. For example, you might be interested in estimating whether your organization will be able to meet product demand for the next quarter.
• Identify the datasets and variables that need to be taken into consideration. In this case, datasets such as the sales records from the previous year and variables related to capacity, production and demand planning .
• Choose a business forecasting method that adjusts to your dataset and forecasting goals. That depends on whether your problem or question can be solved using a qualitative, quantitative or mixed approach.
• Based on the analysis of historical data, you can proceed to estimate future business performance. Keep in mind that the accuracy of your business forecasting depends on the quality of your data.
• Determine the discrepancy between your business forecast and actual business performance. Document your findings and improve your business forecasting process.

As stated above, there are two main types of business forecasting methods, qualitative and quantitative. We’ve compiled some of the more common forecasting models from both sides below.

Delphi Method

This qualitative business forecasting method consists in gathering a panel of subject matter experts and getting their opinions on the same topic in a manner in which they can’t know each other’s thoughts. This is done to prevent bias , which makes it possible for a manager to objectively compare their opinions and see if there are patterns, consensus or division.

Market Research

There are many market research techniques that evaluate the behavior of customers and their response to a certain product or service. Some of those market research methods collect and analyze quantitative data, such as digital marketing metrics and others qualitative data, such as product testing, or customer interviews.

Time Series Analysis

Also referred to as “trend analysis method,” this business forecasting technique simply requires the forecaster to analyze historical data to identify trends. This data analysis process requires statistical analysis as outliers need to be removed. More recent data should be given more weight to better reflect the current state of the business.

The Average Approach

The average approach says that the predictions of all future values are equal to the mean of the past data. Past data is required to use this method, so it can be considered a type of quantitative forecasting. This approach is often used when you need to predict unknown values as it allows you to make calculations based on past averages, where one assumes that the future will closely resemble the past.

The Naïve Approach

The naïve approach is the most cost-effective and is often used as a benchmark to compare against more sophisticated methods. It’s only used for time series data where forecasts are made equal to the last observed value. This approach is useful in industries and sectors where past patterns are unlikely to be reproduced in the future. In such cases, the most recent observed value may prove to be the most informative.

• Develop the Basis: Before you can start forecasting, you must develop a system to investigate the current economic situation around you. That includes your industry and its present position as well as its popular products to better estimate sales and general business operations.
• Estimating Future Business Operations: Now comes the estimation of future conditions, such as the course that future events are likely to take in your industry. Again, this is based on collected data to help with quantitative estimates for the scale of operations in the future.
• Regulating Forecasts: Whatever your forecast is, it must be compared to actual results. This is the only way to find deviations from the norm. Then the reasons for those deviations must be figured out, so action can be taken to correct those deviations in the future.
• Reviewing Forecasting Process: By reviewing the deviations between forecasts and actual performance data, improvements are made in the process, allowing you to refine and review the information for accuracy.

Your forecast will only be as good as the data you put into it. Before collecting data, ask yourself these questions:

• Why collect data?
• What kind of data?
• When to collect it?
• Where to collect it?
• Who will collect it?
• How will it be collected?

These are the questions that will shape your plan for the collection of data, a crucial facet of business forecasting. Once you have your plan, you can collect data from a variety of sources.

Primary Sources

Primary sources contain first-hand data, often collected with reporting tools . These are the ones that you or the person assigned this task to collect personally. If primary data is not available, you must go out and source it through interviews, questionnaires or observations.

Secondary Sources

Secondary sources contain published data or data that has been collected by others. This includes official reports from governments, publications, financial statements from banks or other financial institutions, annual reports of companies, journals, newspapers, magazines and other periodicals.

If business forecasting were a crystal ball, then everyone would be reaping the rewards of their foresight. While business forecasting is a tool to get a better view of what the future might have in store, there’s the argument that it’s wasting valuable time and resources on little return.

It’s true; you can follow the steps, use a variety of methodologies and still get it wrong. It is, after all, the future. There’s no way to ever manage all the variables that can impact future events. There are errors in calculations and the innate prejudices of the people managing the process, all of which add to the unpredictability of the results.

While you’re not going to have a clear, unobscured vision of the future by using business forecasting, it can provide you with insight into probable future trends to give your organization an advantage. Even a small step can be a great leap forward in the highly competitive world of business. By combining statistical and econometric models with experience, skill and objectivity, business forecasting is a formidable tool for any organization looking for a competitive advantage.

Clearly, business forecasting is a project unto itself. To manage a project and collect the data in a way that’s useful in the future, you need a project management tool that can help you plan your process and select the data that helps you decide on a way forward. 

ProjectManager is award-winning software that organizes projects with features that address every phase. The first thing in forecasting is choosing how you’ll take action and make a plan. For example, if you’re going to interview customers to see where the market is likely headed, you’ll need to schedule those interviews. Our online Gantt chart places those interviews as tasks on a timeline so you can get everyone interviewed before your deadline. 

Store All of Your Data in One Place

Those interviews will produce a lot of paperwork, and your data needs to be collected and stored somewhere easily accessible. You can attach notes to each task so the paperwork for each interviewee is saved with the notes that you took. You can also tag those tasks to make it easier to filter the project and locate the interview subjects for which you’re looking. If you’re worried that there’ll be too many documents and images attached to one task, don’t worry as we have unlimited file storage. 

ProjectManager can’t predict the future, but it does provide you with the tools you need to take advantage of business forecasting. Our project management software collects data in real-time, and stores past data, allowing you to filter information and pull up the metrics you need to make the right decision. Try it today with this free 30-day trial.

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Run » finance, how to create a financial forecast for a startup business plan.

Financial forecasting allows you to measure the progress of your new business by benchmarking performance against anticipated sales and costs.

When starting a new business, a financial forecast is an important tool for recruiting investors as well as for budgeting for your first months of operating. A financial forecast is used to predict the cash flow necessary to operate the company day-to-day and cover financial liabilities.

Many lenders and investors ask for a financial forecast as part of a business plan; however, with no sales under your belt, it can be tricky to estimate how much money you will need to cover your expenses. Here’s how to begin creating a financial forecast for a new business.

[Read more: Startup 2021: Business Plan Financials ]

Start with a sales forecast

A sales forecast attempts to predict what your monthly sales will be for up to 18 months after launching your business. Creating a sales forecast without any past results is a little difficult. In this case, many entrepreneurs make their predictions using industry trends, market analysis demonstrating the population of potential customers and consumer trends. A sales forecast shows investors and lenders that you have a solid understanding of your target market and a clear vision of who will buy your product or service.

A sales forecast typically breaks down monthly sales by unit and price point. Beyond year two of being in business, the sales forecast can be shown quarterly, instead of monthly. Most financial lenders and investors like to see a three-year sales forecast as part of your startup business plan.

Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign.

Tim Berry, president and founder of Palo Alto Software

Create an expenses budget

An expenses budget forecasts how much you anticipate spending during the first years of operating. This includes both your overhead costs and operating expenses — any financial spending that you anticipate during the course of running your business.

Most experts recommend breaking down your expenses forecast by fixed and variable costs. Fixed costs are things such as rent and payroll, while variable costs change depending on demand and sales — advertising and promotional expenses, for instance. Breaking down costs into these two categories can help you better budget and improve your profitability.

"Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Tim Berry, president and founder of Palo Alto Software, told Inc . "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such."

Project your break-even point

Together, your expenses budget and sales forecast paints a picture of your profitability. Your break-even projection is the date at which you believe your business will become profitable — when more money is earned than spent. Very few businesses are profitable overnight or even in their first year. Most businesses take two to three years to be profitable, but others take far longer: Tesla , for instance, took 18 years to see its first full-year profit.

Lenders and investors will be interested in your break-even point as a projection of when they can begin to recoup their investment. Likewise, your CFO or operations manager can make better decisions after measuring the company’s results against its forecasts.

[Read more: ​​ Startup 2021: Writing a Business Plan? Here’s How to Do It, Step by Step ]

Develop a cash flow projection

A cash flow statement (or projection, for a new business) shows the flow of dollars moving in and out of the business. This is based on the sales forecast, your balance sheet and other assumptions you’ve used to create your expenses projection.

“If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months,” wrote Inc . The cash flow statement will include projected cash flows from operating, investing and financing your business activities.

Keep in mind that most business plans involve developing specific financial documents: income statements, pro formas and a balance sheet, for instance. These documents may be required by investors or lenders; financial projections can help inform the development of those statements and guide your business as it grows.

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7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

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Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

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What Is Business Forecasting?

What exactly is business forecasting? To help answer this question, consider this. Whether you realize it or not, virtually every business decision and process is based on a forecast. Anything you plan is generally based on an assumption of something happening in the future which, by definition, is a forecast. Not all forecasts are derived from sophisticated methods, but an educated guess about the future is more valuable for the purposes of planning than no forecast at all.

It does not matter which industry you are in, whether your company manufactures products or offers services, or whether your company is small or large, you must have forecasts to plan effectively. Of course, the more accurate the forecasts, the better the plan. It stands to reason that if we know what happened in the past and why, or have insight into what may occur next, we can then predict what is likely to happen in the future. With this information, we can potentially alter the future to the company’s advantage.

Business Forecasting Drives Better Decision Making

Business Forecasting is the process of using analytics, data, insights, and experience to make predictions and respond to various business needs. The insight gained by Business Forecasting enables companies to automate and optimize their business processes. A Forecaster’s goal is to go beyond knowing what has happened and provide the best assessment of what will happen in the future to drive better decision making.

Many people think of a Business Forecast as how many of something we will sell next week. That is part of it, but Business Forecasting can encompass anything that identifies the likelihood of a future outcome, provides comparative information using analytics, or drives data-driven business decisions.

What Is Business Forecasting Used For?

Business Forecasting can be used for:

• Strategic planning and decision-making (long-term planning)
• Finance and accounting (budgets and cost controls)
• Marketing (consumer behavior, life cycle management, pricing)
• Operations and supply chain (resource planning, production, logistics, inventory)

Business Forecasting Techniques

At the heart of business process decision making is the forecast, which involves techniques including:

• Qualitative Forecasting : Refers to the use of opinion or educated guesses in developing forecasts.
• Quantitative Forecasting : Used to develop a future forecast using past data and, often, statistical or mathematical models.

These techniques, along with analyzing data and the use of statistical algorithms, can also be the foundation and input into a Demand Plan. For some companies, the forecast may be considered the Baseline Demand Forecast and is more statistically driven, and is a critical part of Demand Planning.

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What Is Business Forecasting? Why It Matters

April 25, 2021 - 10 min read

Companies conduct business forecasts to determine their goals, targets, and project plans for each new period, whether quarterly, annually, or even 2–5 year planning.

Forecasting helps managers guide strategy and make informed decisions about critical business operations such as sales, expenses, revenue, and resource allocation . When done right, forecasting adds a competitive advantage and can be the difference between successful and unsuccessful companies.

In this guide to business forecasting, we'll cover: 

• What is business forecasting?
• What are the best forecasting techniques?
• Why forecasting in management is important
• How to conduct business forecasts
• A few forecasting examples for businesses

An introduction to business forecasting

What is business forecasting? Business forecasting is a projection of future developments of a business or industry based on trends and patterns of past and present data. 

This business practice helps determine how to allocate resources and plan strategically for upcoming projects, activities, and costs. Forecasting enables organizations to manage resources , align their goals with present trends, and increase their chances of surviving and staying competitive. 

The purpose of forecasts is to develop better strategies and project plans using available, relevant data from the past and present to secure your business's future . Good business forecasting allows organizations to gain unique, proprietary insights into likely future events, leverage their resources, set product team OKR , and become market leaders.

Managers conduct careful and detailed business forecasts to guarantee sound decision-making based on data and logic, not emotions or gut feelings.  

What are important business forecasting methods?

There are several business forecasting methods. They fall into two main approaches: 

• Quantitative forecasting

Qualitative forecasting

Quantitative and qualitative forecasting techniques use and provide different sets of data and are needed at different stages of a product's life cycle.

Note that significant changes in a company, such as new product focus, new competitors or competitive strategies, or changing compliance requirements diminish the connection between past and future trends. This makes choosing the right forecasting method even more important.

Quantitative business forecasting

Use quantitative forecasting when there is accurate past data available to analyze patterns and predict the probability of future events in your business or industry. 

Quantitative forecasting extracts trends from existing data to determine the more probable results. It connects and analyzes different variables to establish cause and effect between events, elements, and outcomes. An example of data used in quantitative forecasting is past sales numbers.

Quantitative models work with data, numbers, and formulas. There is little human interference in quantitative analysis. Examples of quantitative models in business forecasting include:

• The indicator approach : This approach depends on the relationship between specific indicators being stable over time, e.g., GDP and the unemployment rate. By following the relationship between these two factors, forecasters can estimate a business's performance. 
• The average approach : This approach infers that the predictions of future values are equal to the average of the past data. It is best to use this approach only when assuming that the future will resemble the past.
• Econometric modeling : Econometric modeling is a mathematically rigorous approach to forecasting. Forecasters assume the relationships between indicators stay the same and test the consistency and strength of the relationship between datasets.
• Time-series methods : Time-series methods use historical data to predict future outcomes. By tracking what happened in the past, forecasters expect to get a near-accurate view of the future.

Qualitative business forecasting is predictions and projections based on experts' and customers' opinions. This method is best when there is insufficient past data to analyze to reach a quantitative forecast. In these cases, industry experts and forecasters piece together available data to make qualitative predictions.

Qualitative models are most successful with short-term projections. They are expert-driven, bringing up contrasting opinions and reliance on judgment over calculable data. Examples of qualitative models in business forecasting include:

• Market research : This involves polling people – experts, customers, employees – to get their preferences, opinions, and feedback on a product or service.
• Delphi method : The Delphi method relies on asking a panel of experts for their opinions and recommendations and compiling them into a forecast.

How do you choose the right business forecasting technique?

• Choosing the right business forecasting technique depends on many factors. Some of these are:
• Context of the forecast
• Availability and relevance of past data
• Degree of accuracy required
• Allocated time to conduct the forecast
• Period to be forecast 
• Costs and benefits of the forecast
• Stage of the product or business needing the forecast

Managers and forecasters must consider the stage of the product or business as this influences the availability of data and how you establish relationships between variables. A new startup with no previous revenue data would be unable to use quantitative methods in its forecast.

The more you understand the use, capabilities, and impact of different forecasting techniques, the more likely you will succeed in business forecasting. 

Why is business forecasting important?

Any insight into the future puts your organization at an advantage. Forecasting helps you predict potential issues, make better decisions, and measure the impact of those decisions. 

By combining quantitative and qualitative techniques, statistical and econometric models , and objectivity, forecasting becomes a formidable tool for your company. 

Business forecasting helps managers develop the best strategies for current and future trends and events. Today, artificial intelligence, forecasting software, and big data make business forecasting easier, more accurate, and personalized to each organization.

Forecasting does not promise an accurate picture of the future or how your business will evolve, but it points in a direction informed by data, logic, and experiential reasoning. 

What are the integral elements of business forecasting?

While there are different forecasting techniques and methods, all forecasts follow the same process on a conceptual level. Standard elements of business forecasting include:

• Prepare the stage : Before you begin, develop a system to investigate the current state of business.
• Choose a data point : An example for any business could be "What is our sales projection for next quarter?"
• Choose indicators and data sets : Identify the relevant indicators and data sets you need and decide how to collect the data.
• Make initial assumptions : To kickstart the forecasting process, forecasters may make some assumptions to measure against variables and indicators.
• Select forecasting technique : Pick the technique that fits your forecast best.
• Analyze data : Analyze available data using your selected forecasting technique.
• Estimate forecasts : Estimate future conditions based on data you've gathered to reach data-backed estimates. 
• Verify forecasts : Compare your forecast to the eventual results. This helps you identify any problems, tweak errant variables, correct deviations, and continue to improve your forecasting technique.
• Review forecasting process : Review any deviations between your forecasts and actual performance data.

How do you do business forecasting?

Successful business forecasting begins with a collaboration between the manager and forecaster. They work together to answer the following questions:

• What is the purpose of the forecast? How will it be used? 
• What are the components and dynamics of the system the forecast is focused on? 
• How relevant is past data in estimating the future? 

Once these answers are clear, choose the best forecasting methods based on the stage of the product or business life cycle, availability of past data, and skills of the forecasters and managers leading the project.

With the right forecasting method, you can develop your process using the integral elements of business forecasting mentioned above. 

How do you get data for business forecasting?

A forecast is only as good as the data supplied. Before collecting data, ask:

• Why do you need it?
• What kind of data do you need?
• When will you collect it?
• Where will you gather it?
• Who is in charge of collecting it?
• How will you collect it?
• How will you analyze it?

When you have these answers, you can start collecting data from two main sources:

• Primary sources : These sources are gathered first-hand using reporting tools — you or members of your team source data through interviews, surveys, research, or observations.
• Secondary sources : Secondary sources are second-hand information or data that others have collected. Examples include government reports, publications, financial statements, competitors' annual reports, journals, and other periodicals.

Business forecasting examples

Some forecasting examples for business include: 

• Calculating cash flow forecasts, i.e., predicting your financial needs within a timeframe
• Estimating the threat of new entrants into your market
• Measuring the opportunity of developing a new product or service
• Estimating the costs of recurring bills
• Predicting future sales growth based on past sales performance
• Analyzing relationships between variables, e.g., Facebook ads and potential revenue
• Budgeting contingencies and efficient allocation of resources
• Comparing customer acquisition costs and customer lifetime value over time

What are the limits of business forecasting?

You can follow the rules, use the right methods, and still get your business forecast wrong. It is, after all, an attempt to predict the future. Some limits to business forecasting include:

• Biases and errors by the forecasters or managers 
• Incorrect information from employees, experts, or customers 
• Inaccurate past numbers 
• Sudden change in market conditions
• New industry regulations

How Wrike helps with business forecasting

The more accurate your business forecasting, the more effective your strategies and plans can be. While many things in business are out of your control, having an informed forecast of what lies ahead makes you prepared and confident about the future.

Wrike helps gather data in one central platform, extract insights, and communicate findings with forecasters and managers. Other benefits of Wrike include real-time data, integrations with other forecasting software, streamlined collaboration, and visibility into every business forecasting project. 

Are you ready to make projections for your business, allocate your resources for the best results, and improve your business forecasting process? Get started with a two-week free trial of Wrike today.

Kelechi Udoagwu

Kelechi is a freelance writer and founder of Week of Saturdays, a platform for digital freelancers and remote workers living in Africa.

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What Is Business Forecasting? Predictions to Drive Success

November 29, 2021

by Alexandra Vazquez

In this post

Types of business forecasts, business forecasting methods, benefits of business forecasting, business forecasting challenges, business forecasting vs. scenario planning, business forecasting process, business forecasting examples.

It’s time to look inside your crystal ball and start forecasting. Forecasting gives you the tools you need to make reliable predictions about foreseeable events. 

What is business forecasting? 

Business forecasting is the process of analyzing data to predict future company needs and make insight-driven development decisions. 

There’s really no downside to being prepared! Building a strong forecast prepares businesses for potential issues and identifies areas for profitable growth. Even if your predictions end up being inaccurate, you’ll have all the necessary data and information to get closer to the final forecast. 

Some companies utilize   predictive analytics software   to collect and analyze the data necessary to make an accurate business forecast. Predictive analytics solutions give you the tools to store data, organize information into comprehensive datasets, develop predictive models to forecast business opportunities, adapt datasets to data changes, and allow import/export from other data channels. 

Businesses can create various types of forecasts with business forecasting strategies. Because historical data and market trends affect so many aspects of business, comprehensive predictions can help prepare almost every element of your company. 

• General business forecasting predicts overall market trends and external factors that affect your business’ success. 
• Accounting forecasting creates projections of future business costs . 
• Budget forecasting makes predictions for allocating the budget needed for future projects or addressing potential issues.   Budgeting and forecasting software   is an indispensable tool if you’re looking to forecast for budgeting your business activities.
• Financial forecasting projects a company’s monetary value as a whole. You can use the current assets and liabilities from your  balance sheet  to help you make a prediction.
• Demand forecasting predicts the future needs of your target customer base. 
• Supply forecasting works with demand forecasting to allocate the necessary resources for fulfilling upcoming customer demands.
• Sales forecasting predicts the expected success of the company offerings and how it’ll affect future sales and cash flow.
• Capital forecasting makes predictions about a company’s future assets and liabilities.

There are two main types of business forecasting methods: quantitative and qualitative. While both have unique approaches, they’re similar in their goals and the information used to make predictions – company data and market knowledge. 

Quantitative forecasting

The quantitative forecasting method relies on historical data to predict future needs and trends. The data can be from your own company, market activity, or both. It focuses on cold, hard numbers that can show clear courses of change and action. This method is beneficial for companies that have an extensive amount of data at their disposal.

There are four quantitative forecasting methods: 

• Trend series method: Also referred to as time series analysis, this is the most common forecasting method. Trend series collects as much historical data as possible to identify common shifts over time. This method is useful if your company has a lot of past data that already shows reliable trends.  
• The average approach: This method is also based on repetitive trends. The average approach assumes that the average of past metrics will predict future events. Companies most commonly use the average approach for inventory forecasting.
• Indicator approach: This approach follows different sets of indicator data that help predict potential influences on the general economic conditions, specific target markets, and supply chain. Some examples of indicators include changes in Gross Domestic Product (GDP), unemployment rate, and Consumer Price Index (CPI). By monitoring the applicable indicators, companies can easily predict how these changes may affect their own business needs and profitability by observing how they interact with each other. This approach would be the most effective for companies whose sales are heavily affected by specific economic factors.
• Econometric modeling: This method takes a mathematical approach using regression analysis to measure the consistency in company data over time. Regression analysis uses statistical equations to predict how variables of interest interact and affect a company. The data used in this analysis can be internal datasets or external factors that can affect a business, such as market trends, weather, GDP growth, political changes, and more. Econometric modeling observes the consistency in those datasets and factors to identify the potential for repeat scenarios in the future.

Qualitative forecasting

The qualitative forecasting method relies on the input of those who influence your company’s success. This includes your target customer base and even your leadership team. This method is beneficial for companies that don’t have enough complex data to conduct a quantitative forecast.

There are two approaches to qualitative forecasting:

• Market research: The process of collecting data points through direct correspondence with the market community. This includes conducting surveys, polls, and focus groups to gather real-time feedback and opinions from the target market. Market research looks at competitors to see how they adjust to market fluctuations and adapt to changing  supply and demand . Companies commonly utilize market research to forecast expected sales for new product launches.  
• Delphi method: This method collects forecasting data from company professionals. The company’s foreseeable needs are presented to a  panel of experts, who then work together to forecast the expectations and business decisions that can be made with the derived insights. This method is used to create long-term business predictions and can also be applied to sales forecasts.

There are several benefits to making effective forecasts for your business. You gain valuable insights into its different aspects and the future of its success.

• Foresee upcoming changes with a heads up on potential market changes that can affect your business. With the right prediction, you can strategize the decisions to succeed in the face of the challenges ahead before they become costly surprises.
• Decrease the cost of unexpected demand by preparing ahead of time. Business forecasting is a great starting point for   demand planning . If you plan to incorporate demand forecasting into your business processes, you’ll be prepared for upcoming market demands and avoid the extra costs associated with an influx of demand that you weren’t ready for.
• Increase customer satisfaction by giving them what they want, when they want it. Demand planning doesn’t just benefit you. With the right business forecast, your company can offer products or services to the target industry and meet their expectations. A company ready to serve its market is always met with customer satisfaction and loyalty.
• Set long- and short-term goals by tracking your progress. Business forecasting tools help you outline your future company objectives. Continuous predictions allow you to track the progress of your proposed goals as those future expectations become the present reality. 
• Learn from the past by analyzing it. Forecasting enables you to collect and study extensive historical company data. Keeping a close eye on this data can help you identify where things may have gone wrong in the past. With this new information, your company can make the necessary adjustments to avoid similar mistakes in the future.

While the benefits of business forecasting highlight all of the amazing advantages it has to offer, it’s not a surefire way to prepare for the future. Companies who plan to forecast should also keep the challenges in mind and make sure that forecasting has more pros than cons for their business. Below are some of the notable challenges of business forecasting.

• You can’t always expect the unexpected. While old data can help you gain insights into company processes and learn from mistakes, history doesn’t always repeat itself. Business forecasting isn’t a perfect process, and although helpful, it may not precisely predict future trends or business matters using old company data alone. It operates on the assumption that what happened will most likely happen again. Unfortunately, this is not always the case, and the hard work put into preparing for a forecasted event may never come to fruition. 
• It takes time to create an accurate forecast. Forecasting can be a lengthy process when started from scratch. Some companies find it challenging to gather the resources needed to begin predicting and allocate the time to do it correctly. 
• Historical data will always be outdated. There’s no way to know what’ll happen next. Although historical information is very valuable, it’s forever considered “old”. Forecasts are never based on the present and, therefore, are only as accurate as the data you already collected.

Business forecasting is often confused with scenario planning because of their shared goal of preparing for the future. Both rely on learning from past mistakes and reflecting on what decisions must be made to drive success. However, business forecasting and scenario planning differ in the preparation process. 

Business forecasting focuses on a problem at hand and uses historical data to predict what might happen next. It emphasizes   predictive analytics   and the need to eliminate existing uncertainties. The problem can be as broad as the actual performance of the entire company, or as specific as how a single product might sell in the future based on past market trends. 

While built on tangible data, forecasting is essentially a guess of the future and you need to make assumptions ahead of time to prepare for any predicted issues. Forecasting is an all-hands-on-deck approach that involves many departments, including analysts, economists, managers, and more.

Scenario planning   creates multiple scenarios to help prepare for the future. With these scenarios in mind, a company can begin planning a course of action to achieve the desired outcome. This includes creating step-by-step strategies and timelines for achieving objectives. 

While business forecasting focuses on past information, scenario planning takes the past, present, and future into consideration with learnings from the past, understanding the capabilities of the present, and aspiring for future success. Although a team’s input is important in scenario planning, company’s primary decision-makers carry out the bulk of the process.   

The way a company forecasts is always unique to its needs and resources, but the primary forecasting process can be summed up in five steps. These steps outline how business forecasting starts with a problem and ends with not only a solution but valuable learnings.

1. Choose an issue to address

The first step in predicting the future is choosing the problem you’re trying to solve or the question you’re trying to answer. This can be as simple as determining whether your audience will be interested in a new product your company is developing. Because this step doesn’t yet involve any data, it relies on internal considerations and decisions to define the problem at hand. 

2. Create a data plan

The next step in forecasting is to collect as much data as possible and decide how to use it. This may require digging up some extensive historical company data and examining the past and present market trends. Suppose your company is trying to launch a new product. In this case, the gathered data can be a culmination of the performance of your previous product and the current performance of similar competing products in the target market.

3. Pick a forecasting technique

After collecting the necessary data, it’s time to choose a business forecasting technique that works with the available resources and the type of prediction. All the forecasting models are effective and get you on the right track, but one may be more favorable than others in creating a unique, comprehensive forecast. 

For example, if you have extensive data on hand, quantitative forecasting is ideal for interpretation. Qualitative forecasting is best if you have less hard data available and are willing to invest in extensive market research.  

4. Analyze the data

Once the ball starts rolling, you can begin identifying patterns in the past and predict the probability of their repetition. This information will help your company’s decision-makers determine what to do beforehand to prepare for the predicted scenarios.

5. Verify your findings

The end of business forecasting is simple. You wait to see if what you predicted actually happens. This step is especially important in determining not only the success of your forecast but also the effectiveness of the entire process. Having done some forecasting, you can compare the present experience with these forecasts to identify potential areas for growth.

When in doubt, never throw away “old” data. The final information of one forecasting process can also be used as the past data for another forecast. It’s like a life cycle of business development predictions.

With the different types of business forecasting come different potential use cases. A company may choose to utilize several elements of business forecasting to prepare for various situations. Here are some real-life examples where business forecasting would be valuable. 

The seasoned veteran

Suppose you represent a company that has been in the market for a long time but has never tried business forecasting. Because of the long history of company data, you choose to try out quantitative business forecasting. Your aim is to make predictions using the most cost-effective and least time-consuming method. With those considerations, you may opt for the trend series method to manually identify common trends in old data, determine the likelihood of repeat instances, and forecast accordingly.

The new kid on the block

Imagine you are a new company that has entered the market to start selling your own brand of smartphones. You may think that business forecasting is impossible because you don’t have any historical company data to work off of. However, you can utilize qualitative business forecasting! Because the smartphone industry is a highly competitive one, you can use market research to take advantage of publicly available market data.

The one who wants the best of both worlds

Imagine you work for a recruiting company that has noticed that the country’s unemployment rate heavily affects company performance and has the data to prove it. As you have a clear indicator that directly impacts the potential for success, using the indicator approach to create long-term predictions would be the right call.

However, your company stresses the importance of integrating expert knowledge into the forecasting process. This extra note means that some qualitative forecasting can be used as well. You may choose to use the Delphi method to collect expert opinions and weigh that into the final forecasts as well.

What do the stars have in store for you?

Creating comprehensive predictions isn’t rocket science. With business forecasting, seeing the future is as easy as learning from the past. What you do with your findings is what will set you apart. 

Want to start forecasting for your business? Learn more about  business analytics  and how it helps collect the necessary data and insights. 

The future starts now

Automate business forecasting data analysis with predictive analytics software.

Alexandra Vazquez is a Senior Content Marketing Specialist at G2. She received her Business Administration degree from Florida International University and is a published playwright. Alexandra's expertise lies in writing for the Supply Chain and Commerce personas, with articles focusing on topics such as demand planning, inventory management, consumer behavior, and business forecasting. In her spare time, she enjoys collecting board games, playing karaoke, and watching trashy reality TV.

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Bringing a real-world edge to forecasting

CFOs know what a “good” forecasting process should look like: it should be accurate and compre­hensive but flexible enough to inform a range of critical business decisions—capital reallocation, hiring, strategy, sales, production, and more.

But CFOs also recognize that there is no “typical” forecasting process: it will look different in different organizations based on sector-specific factors, feedback cycles, and, most critically, how the forecast is being used. A maker of packaged foods that is releasing new products every quarter will rely on the forecast to keep a close watch on inventory, while a mining company that is considering new plant construction over the next three years will use the forecast to predict capacity and pricing.

How do your forecasts roll?

The best predictor of satisfaction among the CFOs we surveyed was whether or not they used a “rolling” forecast—one that provides frequent updates and adjusts inputs in a predictable way as conditions change. These types of forecasts are common in a retail or software setting, where customers provide near-real-time feedback through usage, traffic, and purchasing patterns. Rolling forecasts can be used to great effect in other situations as well. An organization that maintained industrial equipment built a simple model to update its forecasts as equipment came into the shop, rather than waiting until end-of-year estimates to adjust financial figures. This helped the company avoid sudden swings in recognized revenue in a percent-complete contract model. It also put the management team on the offensive as certain contracts over- or underperformed during the year.

Data availability is typically a major inhibitor of rolling forecasts. But it doesn’t have to be. Many companies have reams of data at their fingertips but don’t know where to get started. In our survey, we found that less than half of companies use any given form of nonfinancial internal data in creating their forecasts. Only 35 percent use external market data, and only 18 percent use additional types of data like weather, traffic, and other external factors as leading indicators of the business (exhibit). With such scant inputs, it’s no surprise that forecast outputs are often underwhelming.

Of course, there is still an important place for one-time forecasting to make major decisions. When it comes to drug development, the initiation of capital projects, or the decision to enter new markets, for instance, senior leaders’ over­­optimism about projects, concerns about sunk costs, and other biases can get in the way of their review of the full range of potential outcomes. In these cases, conducting an assessment against a carefully selected reference class of similar business scenarios can produce valuable insights.

What’s more, companies’ access to ever-larger data sets continues to complicate the forecasting process as much as it enlightens it, leading to even more variety in how forecasts are built. Many of the 130 CFOs we surveyed in a recent study 1 We polled 130 CFOs—90 from small and medium-size companies (less than $200 million in revenue) and 40 from large companies (greater than $1 billion in revenue). Half of them were members of the CFO Leadership Council, a North American professional association of finance executives. The research base included companies from a range of sectors, including technology, healthcare, and industrials. say they now run more than one type of forecasting process in their organizations—rolling forecasts to manage the business, and ad hoc processes to make specific decisions (see sidebar, “How do your forecasts roll?”).

But while many of the CFOs we surveyed expressed general satisfaction with the results of their fore­casting efforts (exhibit), some 40 percent also told us that their forecasts are not particularly accurate and that the process takes far too much time.

That’s likely because they use financial measures rather than operational outcomes as indicators of forecasting effectiveness—if they review the success of their forecasting efforts at all. A focus only on financial inputs can mask big issues with companies’ forecasting processes. By contrast, incorporating real-world operations insights into the financial-forecasting process can help CFOs and finance teams predict bottom-line issues early, based on a careful assessment of quality, operations, and customer-retention measurements. Senior leaders can then address performance issues before they become big problems, and the incentives of even the smallest subunit of the business would be targeted toward long-term value creation.

Integrating operations data within forecasts won’t be easy, of course. Finance and business leaders will need to let go of traditional budgeting mindsets and explore new ways of working together. The good news? Automation and other digital technologies now make that easier. And four criteria show promise for injecting more accuracy and reli­ability into forecasting models, regardless of industry: build a momentum case separate from the business plan, use a variety of operational and external inputs, automate the forecast, and measure effectiveness with a fine-grained level of detail.

Building a better forecast

The typical forecasting process follows a pattern that contributes to inaccurate projections and a defeating, self-reinforcing cycle.

At one large indus­trial manufacturing and services company, for instance, managers in the business units and sub­units are held to earnings targets that are rolled up into the overarching forecast. Over the years, these managers have become adept at finding the one or two things that will help them make their number, often at the expense of longer-term investment in quality, customer retention, and oper­a­tional effi­ciency. Under the typical finance-focused forecasting exercise, no one checks operational metrics so long as the bottom line comes in strong, which it had for a while. Now the com­pany’s per­formance is stuck in low gear: the most successful business units keep committing to higher numbers that eventually lead to a deterioration in quality, while the least successful businesses get scruti­nized, adjusted, and fixed. The winners and losers flip, and the cycle repeats itself.

Some companies have worked at breaking this disappointing pattern. They’ve begun rethinking how they measure the success of their forecasting processes—focusing on the following four questions:

Have we built a momentum case? Many financial-planning and analysis (FP&A) teams spend most of their time looking at historical data to explain current outcomes. When they do get to look forward, they are likely focused on the budget, or on rolling up commitments from different business units into the overall business plan. Sometimes the business plan itself passes for the forecast. This, of course, just creates an echo chamber.  No one is explicitly discussing how external factors and impending market shifts could affect forecasts. A better approach is to create a market-momentum case that relies on internal and external data as well as end-market trends to build the forecast. Once this unbiased momentum case is in place, senior managers can layer new and additional market infor­mation on top. Then any initiatives, investments, and strategic moves can be assessed relative to the base case.

In one industrial company that makes construction products, for instance, initiatives proposed across different lines of business were being valued in a vacuum. The teams charged with managing grouts and concrete, for instance, had no line of sight into what was going on with the frame-protection or frame-reinforcement business units. It was hard for senior leaders, then, to understand how to react to market shifts throughout the year and what actions the company should take. The FP&A team built a momentum case that set targets based on market dynamics in individual lines of business rather than allocating a single rate of improvement to all products. These targets much more closely reflected the full potential of the individual business lines, and, when compared with base-case and other scenarios, allowed the company to allocate resources and take on initiatives to address market changes with much more agility than before.

The CFO’s role in this process is to work with business-unit leaders to set realistic but aggressive targets in light of the market environment in which they operate. That means providing clear direction to all the business-unit finance leaders about which basic assumptions to use in the forecasts—for instance, market-growth rates—even if the process of forecasting sales and profit for each business remains distributed.

Are we using a variety of operational indicators and external inputs? Operational inputs are important leading indicators of performance; often, line leaders know how the company is faring months before the financial reports appear. Many times, however, operating data sit in disparate systems that don’t work well with financial enterprise resource planning (ERP) systems. And rather than adhere to a standard set of key performance indicators (KPIs) for use throughout the organization, managers at different levels use different indicators. Some track the business, some manage individual performance, and some review indicators of financial performance.

One aerospace company had collected thousands of data points on every aircraft in its fleet. However, when the time came to create the annual forecast, it used only a small fraction of the data because much of the information was inaccessible. Opera­tional and financial data were siloed, spread across many different IT systems. Recognizing a lost opportunity, the company created a thin analytics layer—a simple rules-based SQL program in a data lake—on top of its existing IT infrastructure. This program automatically gathered data from the multiple systems, allowing business-unit leaders to see infor­mation about the entire fleet on a single screen. They finally had operational KPIs integrated into the financial picture. If one site went overbudget on a repair, that information would get immediately recorded in the master model. Leaders at the company are now more confident about setting targets and stretch goals based on a distinct set of operational issues.

Surprisingly, the technical changes required were not difficult; in most cases, it takes no more than a few weeks or months (depending on product complexity) to rebuild forecasting models and link them to the company’s financial-management systems.

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Have we explored automation? Once business leaders have identified the most critical inputs to include in the forecast model, they should consider ways to automate the process and make it easier for business and operations teams to work together on forecasts.

In some cases, the company will need to explore new technologies and modeling techniques. Leadership at a multinational pharmaceutical company, for instance, used machine learning and advanced analytics to understand the variables affecting the performance of its clinical trials. The operations team worked with the business side to aggregate five years of data from more than 300 separate clinical trials (involving more than 100,000 patients) and to evaluate factors such as the clinical trials’ time and costs across multiple geographies. They saw correlations between the rate of enrollment in certain sites and the success of the trials, and they used the data to introduce improvements.

In other instances, the whole forecasting model may be run automatically using macro commands in an Excel spreadsheet, with only a handful of manual inputs from the operations team, the CFO, and the finance team.

Whichever method is chosen, companies can use data that already exist in the company’s ERP or other functional databases and, with simple transformations, spit out a real-time dashboard.

Once the CFO or another senior finance leader decides that automation is a high priority for FP&A, he or she should convene a small team (no more than three to five people from IT and finance) to “connect the pipes.” The team should tackle this challenge incrementally—automating some elements of the forecasting process initially and adding others once the value of the effort is proved.

Are we measuring effectiveness at a fine-grained level? Once the forecast incorporates a range of internal and external inputs, CFOs can test the accuracy of each input, as well as the accuracy of aggregate estimates. By monitoring detailed measures, such as labor productivity, on-time delivery, and other metrics associated with costs and revenues, business leaders will be able to spot the “softer” KPIs that are being overlooked in light of temporarily strong bottom-line perfor­mance. They can then react accordingly.

When the CFO and operations leader at one consumer-goods company reviewed underlying performance metrics for each of the business lines, they saw that a major business unit was being propped up by one rapidly growing product. Based on this insight, senior leadership decided to sell the underperforming parts of that business and double-down where they saw profitable growth. The team had until that point not looked past the simple financial performance of the business unit to the product-level sales and profitability.

If finance and operations leaders can maintain the forecast as a living model, with a clear feed-back loop, they can ensure that any forecasting failures (and there will be failures) lead to real improvements.

The right role for multiples in valuation

Getting started.

Making these changes to the forecasting processes can seem like a monumental shift—“rebuilding the plane while it is flying” is a common complaint among finance teams. With that in mind, the most effective move is to start small. For instance, the CFO should task the FP&A team in a single business unit or region to come up with a model and pressure test it both in the finance function and with nonfinancial leaders. Once there is agreement that the model is unearthing valuable insights, it can be automated, and a similar process can be scaled to the rest of the business.

It’s important that the forecast be pulled out of the politics of budgeting, and that inputs are streamlined, automated, and pressure tested. Even if the business units each manage their own forecast, there is a role for central FP&A to debias the process. The FP&A team at one fashion company, for instance, built a simple regression analysis to understand which business units were forecasting statistically significant changes in their performance or growth trajectory. The outliers were required to provide a detailed buildup of initiatives to prove the forecast was achievable.

Once the hard work of process reengineering is done, finance teams will see a dramatic change in the value of forecasts to the business. They can use time previously spent justifying assumptions to focus on delivering new ideas for improving the performance of the business—and serving as proactive business partners.

Ankur Agrawal is a partner in McKinsey’s New York office, and Jonathan Slonim is a consultant in the New Jersey office. Mark Khavkin is the chief financial officer of Pantheon Platform in San Francisco.

The authors wish to thank the CFO Leadership Council for its contributions to this article.

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7-step guide to financial forecasting & planning for any business

What is financial forecasting, why is it important, and how to properly conduct financial planning and forecasting

• What is financial forecasting?
• Why is it important?
• 4 common types of financial forecasting
• How to do financial forecasting in 7 steps
• Financial forecasting FAQs

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Uncertainty is one of the constant aspects of doing business. Many factors beyond your control can potentially influence the market in ways you didn't expect. For example, new technologies are constantly changing operations across almost all industries at a fundamental level. 

It pays to know what to expect in the near future and plan ahead, hence the need for financial forecasting. Every business (including monopolies) could benefit incredibly from regular  financial forecasting . Here is a comprehensive guide on the importance of financial forecasting for your business model and how to do it.

Failure to conduct regular financial forecasting leaves you flying blind.

What is financial forecasting? 

Financial forecasting refers to financial projections performed to facilitate any decision-making relevant for determining future business performance. The financial forecasting process includes the analysis of past business performance, current  business trends , and other relevant factors.

However, some aspects of financial forecasting may change depending on the type and purpose of the forecast, as will be discussed later. 

Importance of financial forecasting 

Hypothetically speaking, failure to conduct regular financial forecasting leaves you flying blind. Regular forecasting has extensive benefits for some of your business' fundamental operations, including: 

Annual budget planning 

A budget represents your business' cash flow, financial positions, and future goals and expectations for a set fiscal period.  Financial forecasting and planning  work in tandem, as forecasting essentially offers an insight into your business' future—these insights help make budgeting accurate.  

Establishing realistic business goals 

Accurate forecasting will help predict whether (and by how much) your business will grow or decline. As such, you can set realistic and achievable goals—and manage your expectations. 

Identifying problem areas 

Financial forecasting  can help you identify ongoing problems by analyzing the business' past performance. Additionally, you can identify potential problems by getting an insight into what the future holds. 

Reduction of financial risk 

You risk overspending by creating a budget without financial forecasting. In fact, most of your financial decisions would be ill-informed without the input of a financial forecast's results. 

Greater company appeal to attract investors 

Investors use a company's financial forecast to predict its future performance—and the potential ROIs on their investments. Additionally, regular forecasting shows your investors that you are in control and have a solid business plan prepared for the future.

4 common types of financial forecasting 

Businesses conduct financial forecasting for varying purposes. Consequently, forecasting practices are categorized into four types: 

1. Sales forecasting 

Sales forecasting entails predicting the amounts of products/services you expect to sell within a projected fiscal period. There are two sales forecasting methodologies: top-down forecasting and bottom-up forecasting. 

Sales forecasting has many uses and benefits, including budgeting and planning production cycles. It also helps companies manage and allocate resources more efficiently. 

2. Cash flow forecasting 

Cash flow forecasting  entails estimating the flow of cash in and out of the company over a set fiscal period. It's based on factors such as income and expenses. It has many uses and benefits, including identifying immediate funding needs and budgeting. However, it is worth noting that cash flow financial forecasting is more accurate over a short term. 

3. Budget forecasting 

As a financial guide for your business' future, a budget creates certain expectations about your company's performance. Budget forecasting aims to determine the ideal outcome of the budget, assuming that everything proceeds as planned. It relies on the budget's data, which relies on financial forecasting data. 

4. Income forecasting 

Income forecasting entails analyzing the company's past revenue performance and current growth rate to estimate future income. It is integral to doing  cash flow  and balance sheet forecasting. Additionally, the company's investors, suppliers, and other concerned third parties use this data to make crucial decisions. For example, suppliers use it when determining how much to credit the company in supplies. 

How to do financial forecasting in 7 steps 

Many integral aspects of your company's current and future operations hinge on the results of your financial forecasts. For example, forecasting results will influence investors' decisions, determine how much your company can get in credit, and more. 

As such, accuracy cannot be overemphasized. Here is a step-by-step guide to ensure that you do it right: 

1. Define the purpose of a financial forecast 

What do you hope to learn from the financial forecast? Do you hope to estimate how many units of your products or services you will sell? Or perhaps you wish to see how the company's current budget will shape its future? Defining your financial forecast's purpose is essential to determining which metrics and factors to consider when doing it. 

2. Gather past financial statements and historical data 

One of the components of financial forecasting involves analyzing past financial data, as explained. As such, it is important to gather all relevant historical  data and records , including: 

• Liabilities 
• Investments 
• Expenditures 
• Comprehensive income 
• Earnings per share 
• Fixed costs

It's important to ensure that you gather all required information as your financial forecast's results will be inaccurate if you exclude relevant data.

3. Choose a time frame for your forecast 

Financial forecasts are designed to give business owners an insight into the company's future. You get to decide how far into the future to look, and it can range from several weeks to several years. However, most companies do forecasts for one fiscal year. 

Financial forecasts change over time as factors such as business and market trends change. Consequently, it is worth noting that financial forecasting is more accurate in the short term than in the long term.

4. Choose a financial forecast method 

There are two financial forecasting methods: 

• Quantitative forecasting uses historical information and data to identify trends, reliable patterns, and trends. 
• Qualitative forecasting analyzes experts' opinions and sentiments about the company and market as a whole. 

Each method is suitable for different uses and has its strengths and shortcomings. However, qualitative forecasting is more suitable for startups without past data to which they can refer. 

5. Document and monitor results 

Financial forecasts are never 100% accurate and tend to change over time. As such, it is important to document and monitor your forecast's results over time, especially after major internal and external developments. It is also important to update your forecasts to reflect the latest developments. Using  forecasting software  to automate related tasks may help too.

6. Analyze financial data 

Regularly analyzing financial data is the best way to tell whether your financial forecasts are accurate. Additionally, continuous financial management and analysis helps you prepare better for the next financial forecast and gives you crucial insights into the company's current financial performance. 

7. Repeat based on the previously defined time frame 

Smart companies conduct regular financial forecasting to stay in the know and in control. As such, it is advisable to repeat the process once the time period set for the current financial forecast elapses. It's also prudent to keep collecting, recording, and analyzing data to improve your financial forecasts' accuracy.

Get accurate metrics for financial forecasting—absolutely free 

An efficient system of collecting, storing, and analyzing data is necessary for accurate financial forecasting. ProfitWell Metrics is a subscription analytics software designed to do all of this on one platform. Some of the metrics that you can get using this program include: 

• Monthly and annual recurring revenues 
• Market and customer segments 
• Customer acquisition and retention 
• Customer lifetime value 
• Churn rate 
• The average revenue per user 

ProfitWell Metrics collects and records all  important metrics , giving you enough data to work with when conducting a financial forecast. Additionally, the data collected in real-time offers crucial insights to help you update your forecasts and other projects accordingly. 

ProfitWell Metrics also integrates seamlessly with other popular data analytics programs, including Google Sheets and Stripe. More importantly, it's 100% free and secure. 

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Financial forecasting FAQs 

Some of the most frequently asked questions regarding financial forecasting include: 

What is the role of forecasting in financial planning? 

Financial forecasting estimates important financial metrics such as sales, income, and future revenue. These metrics are crucial for finance-related operations such as budgeting and financial planning as a whole. Consequently, forecasting functions as a guiding tool (or marking scheme) for financial planning. 

What is the difference between financial forecasting and modeling? 

On the one hand, financial forecasting entails predicting the business' future performance. On the other hand, financial modeling entails simulating how financial forecasts and other data may affect the company's future if everything goes according to plan. Financial modeling is done for very specific and often discrete purposes. 

What is the difference between financial forecasting and budgeting? 

Financial forecasting and budgeting work in tandem and are often misinterpreted as meaning the same thing. However, financial forecasting entails estimating and predicting the company's future performance (financially and in other aspects). On the other hand, budgeting is the company's financial expectations for the future (expectations based on financial forecasts and other data). 

What are the three pro forma statements needed for financial forecasting? 

Pro forma statements are financial reports designed to give insights into how different scenarios would play out based on hypothetical circumstances. There are three pro forma statements: 

• Pro forma statements of income 
• Pro forma cash flow statements 
• Pro forma balance sheets 

Pro forma statements may be hypothetical, but they help companies prepare for an uncertain future. Consequently, they're useful when conducting financial forecasts. 

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What Is Forecasting And Why Do Small Businesses Need It?

Table of Contents

Forecasting is the process of looking at past and present data, as well as marketplace trends, to predict the company’s future financial performance. It enables you to gauge how much revenue you’ll potentially earn in a particular period and plan for big expenses. It’s also a critically important part of running a small business.

Forecasting vs. budgeting

Forecasting is different from budgeting for small businesses , but they go hand in hand. The forecast predicts the results for the company in the future while the budget lays out how the business will get there along the way. A forecast offers a target based on historical data and a budget describes the practical investments that will be made to reach that target.

Unfortunately for many business owners, financial forecasting can be a source of dread, said Clare Levison, a certified public accountant and member of the American Institute of Certified Public Accountants Financial Literacy Commission.

“Many business owners avoid forecasting because it’s tedious or intimidating,” she said. “Small business owners are passionate about what they are doing and don’t love the financial aspect of running a business , but it’s a crucial piece of being successful.”

However, businesses that embrace forecasting may find the insights help them make smarter financial decisions and grow their business in a stable, profitable way.

Budgeting is about planning expenses and setting revenue targets in the near term while forecasting focuses on estimating a business’s future financial situation. The two are related and equally important parts of managing a business’s finances.

What is the importance of forecasting?

Forecasting may seem like yet another item to add to the to-do list, but there are clear benefits to this type of business planning. Here are three big reasons to conduct forecasting.

1. It helps you plan for the future.

Running a business can be uncertain in normal times. Add a global pandemic to the mix and it may be impossible to tell how your business will fare in a week, let alone a year. A forecast brings some clarity to your business, even if it’s bad.

“You can anticipate what could be coming down the pike, not just what’s going on one day,” said Mike Slack, manager of the H&R Block Tax Institute. “It’s crucial that a forecast is created to plan for what’s coming.”  

Slack said to create forecasts for different scenarios ― for instance, a forecast for a nationwide pandemic recovery and one that plans for more shutdowns and restrictions.

2. It can inform business decisions.

Without an accurate representation of what’s going on in your business, you won’t know if there are challenges brewing or if you can chase a new growth opportunity. A forecast can inform business decisions, streamline operations and improve profitability.

[Are you looking for a small business loan? Check out our picks for the best small business loans .]

3. It prevents tax bill surprises.

Death and taxes are two of life’s certainties, yet many small business owners are caught off guard when they are hit with a big tax bill . Forecasting can prevent that shock since it involves laying out all your expenses for the year.

“Without forecasting, you [might still] wind up solving the month-to-month cash flow issues, paying your bills, negotiating new terms every now and then and staying in the black,” said Jon Fasoli, chief design and product officer at Mailchimp. “But come the end of the year, you have a massive tax bill you don’t have the cash for. Avoiding those moments of surprise are done through cash flow forecasting.”

What are the methods used in forecasting?

There are two common methods of forecasting: qualitative and quantitative. The more viable method for your company depends largely on how long you’ve been in business:

• Qualitative forecasting: With this method, you’re making business predictions without the benefit of measuring them against past data. It’s the common method for new businesses that lack historical sales or expense data. It largely relies on the judgment of the person creating the forecast. It’s also a popular method for forecasting far into the future.
• Quantitative forecasting: You can use this method when you have measurable data to inform the forecast. By measuring sales against past performance, you can gauge if business is growing or slowing. It’s a common method for short-term forecasting.

What are the various types of forecasting in business?

Business owners can measure several items to conduct their forecasts:

• Cash flow: Cash flow forecasting means predicting how much money will come in and go out of your business for a set period. The more accurate your cash flow forecast is, the smoother your business will run during that time because you’ll be able to plan your operations according to the money you will and won’t have.
• Sales forecast: To manage inventory or demand properly, you would forecast future sales . This means looking at your business’s past performance to predict your future sales.
• Startup cost forecasting: Used by new businesses, this forecast determines how much in startup costs the company will face in the coming months or year.
• Expense forecasting: Unexpected expenses can eat away at your profits. With expense forecasting, you remove much of the surprise by laying out all the expenses your business will incur over a future period.
• Demand forecasting: To gauge your future sales, you can try to forecast demand. To do this, you’d look at your historical data, including your sales and seasonal trends, to pinpoint future periods of high and low demand.

How do you develop a forecast?

When you’re developing a forecasting method, the level of detail you need depends on your type of business and its complexity. That means taking a close look at each aspect of your business’s financial health and estimating as accurately as possible how it will trend into the future.

Project your revenue

Levison said to forecast your revenue, which is how much sales are coming in; your expenses, which include your contractual obligations, such as rent and credit cards; and your future obligations, which are the items you know you’ll spend money on in the coming year.

At the end of the day, you want to choose a forecasting method that works for you and your small business. Forecasting shouldn’t be a dreaded exercise, but an embraced tool to help you run your business effectively.

“Think of it the same way you would think of a household budget,” Levison said. “Every single person needs a household budget and every single business owner needs a forecast.”

Analyze your expenses

In addition to the money flowing into your business, look at your expenses, including inventory, rent or mortgage, payroll, tax obligations, supplies and all the other monthly costs of operating a business. Combine these data points for a view of what to expect in the next six months, the next year or further in the future.

“For businesses that have historical data, look back at where cash was positive and negative and drill into those moments,” Fasoli said. “What drove cash flow and what was a surprise? And bake that into the forecast.”

Monitor your cash flow

For most small business owners, cash flow is a good place to start, according to Fasoli. After all, cash flow is really what makes or breaks a business.

“The variables baked into the cash flow forecasting should include seasonality, how to anticipate ebbs and flows , the terms of your payments, how much time you anticipate passing between finishing works and getting paid and what structure you have in place to incentivize people to pay on time,” Fasoli said.

Businesses need cash flow like we need air to breathe. To ensure your business survives and thrives, check out these cash flow strategies for small businesses.

The timing of your financial forecast is also important, but how far out you should look depends on your business and temperament. You don’t want to gear up to forecast your business for the next five years only to get overwhelmed quickly. Levison recommends breaking it down into a one-year, three-year and five-year forecast that you update regularly to get a complete picture of your enterprise.

“I encourage people to, on a weekly basis, keep track of revenue and expenses; on a monthly basis, update the annual forecast for the current year; and, on a yearly basis, update the three- and five-year outlooks,” she said.

Forecasting is key to smart planning

Developing a plan for your business is critical, but it’s hard to do that without an idea of what the future holds. By using historical accounting data, you can develop a clear picture of where your finances are today and where they are headed. Armed with this information, you can make more informed decisions about your business that help you grow with purpose and stay profitable. Financial forecasting should be the core of every small business’s planning — without it, you’re operating in the dark.

Jacob Bierer-Nielsen also contributed to this article.

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Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

• They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
• Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
• Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. cash flow statement & projection.

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. balance sheet projection.

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to create financial projections.

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

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. 

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Business Plan Financial Projections: How To Create Accurate Targets

• Written by Keith Murphy
• 16 min read

Small businesses and startups have a lot riding on their ability to create effective and accurate financial projections as part of their business plan. Solid financials are a strong enticement for investors, after all, and can help new businesses chart a course that will take them beyond the legendendarily difficult first year and into a productive and profitable future.

But the need for business owners to look ahead in order to secure funding, increase profits, and make intelligent financial decisions doesn’t end when startups become full-fledged businesses—and business plan financial projections aren’t just for startups. Existing businesses can also put them to good use by harvesting insights from their existing financial statements and creating sales projections and other financial forecasts that guide and improve their ongoing business planning.

What Are Business Plan Financial Projections?

Successful companies plan ahead, looking as best they can into the near and distant future to chart a course to growth, innovation, and competitive strength. Financial projections, both as part of an initial business plan and as part of ongoing business planning, use a company’s financial statements to help business owners forecast their upcoming expenses and revenue in a strategically useful way.

Most businesses use two types of financial projections:

• Short-term projections are broken down by month and generally cover the coming 12 months. They provide a guide companies can use to monitor and adjust their financial activity to set and hit targets for the financial year. In the first year, short-term projections will be entirely estimated, but in subsequent years, historical data can be used to help fine-tune them for greater accuracy and strategic utility.
• Long-term projections are focused on the coming three to five years and are generally used to secure investment (both initial and ongoing), provide a strategic roadmap for the company’s growth, or both.

For startups, creating financial projections is part of their initial business plan. Providing financial forecasts banks and potential investors can use to determine the financial viability of a business is key to obtaining financing and investments needed to get the business off the ground.

For existing businesses—for whom an initial business plan has evolved into business planning—financial projections are useful in attracting investors who want to see clear estimates for upcoming revenue, expenses, and potential growth. They’re also helpful in securing loans and lines of credit from financial institutions for the same reason. And even if you’re not trying to get funding or investments, financial projections provide a useful framework for building budgets focused on growth and competitive advantage.

So whether you’re a small business owner, an aspiring tycoon starting a new business, or part of the financial team at a well-established corporation, what matters most is viewing financial projections as a living, breathing reference tool that can help you plan and budget for growth in a realistic way while still setting aspirational goals for your business.

Financial projections, both as part of an initial business plan and as part of ongoing business planning, use a company’s financial statements to help business owners forecast their upcoming expenses and revenue in a strategically useful way.

Financial Projections: Core Components

Whether you’re preparing them as part of your business plan or to enhance your business planning, you’ll need the same financial statements to prepare financial projections: an income statement, a cash-flow statement, and a balance sheet.

• Income statements , sometimes called profit and loss statements , provide detailed information on your company’s revenue and expenses for a given period (e.g., a quarter, year, or multi-year period).
• Cash flow statements provide a comprehensive view of cash flowing into and out of a business. They record all cash flow from operations, investment, and financing activities.
• Balance sheets are used to showcase a company’s assets, liabilities, and owner’s equity for a specific period.

How to Create Financial Projections

The process of creating financial projections is the same whether you’re drafting a business plan or creating forecasts for an existing business. The primary difference is whether you’ll draw on your own research and expertise (a new business or startup business) or use historical data (existing businesses).

Keep in mind that while you’ll create the necessary documents separately, you’ll most likely finish them by consulting each of them as needed. For example, your sales forecast might change once you prepare your cash-flow statement. The best approach is to view each document as both its own piece of the financial projection puzzle and a reference for the others; this will help ensure you can assemble comprehensive and clear financial projections.

1. Start with a Sales Projection

A sales forecast is the first step in creating your income statement. You can start with a one, three, or five-year projection, but keep in mind that, without historical financial data, accuracy may decrease over time. It’s best to start with monthly income statements until you reach your projected break-even , which is the point at which revenue exceeds total operating expenses and you show a profit. Once you hit the break-even, you can transition to annual income statements.

Also, keep in mind factors outside of sales; market conditions, global environmental, political, and health concerns, sourcing challenges (including pricing changes and increased variable costs) and other business disruptors can put the kibosh on your carefully constructed forecasts if you leave them out of your considerations.

Start with a reasonable estimate of the units sold for the forecast period, and multiply them by the price per unit. This value is your total sales for the period.

Next, estimate the total cost of producing these units (i.e., the cost of goods sold , or COGS; sometimes called cost of sales ) by multiplying the per-unit cost by the number of units produced.

Deducting your COGS from your estimated sales yields your gross profit margin.

From the gross margin, subtract expenses such as wages, marketing costs, rent, and other operating expenses. The result is your projected operating income , or net income .

Using these figures, you can create an income statement:

2. Cash Flow Statement

Tracking your estimated cash inflows and outflows from investment and financing, combined with the cash generated by business operations, is the purpose of a cash flow projection .

Investment activities might include, for example, purchasing real estate or investing in research and development outside of daily operations.

Financing activities include cash inflows from investor funding or business loans, as well as cash outflows to repay debts or pay dividends to shareholders.

A reliable and accurate cash flow projection is essential to managing your working capital effectively and ensuring you have all the cash you need to cover your ongoing obligations while still having enough left to invest in growth and innovation or cover emergencies.

Drawing from our income statement, we can create a basic cash flow statement:

3. The Balance Sheet

Providing a “snapshot” of your businesses’ financial performance for a given period of time, the balance sheet contains your company’s assets, liabilities, and owner’s equity.

Assets include inventory, real estate, and capital, while liabilities represent financial obligations and include accounts payable, bank loans, and other debt.

Owner’s equity represents the amount remaining once liabilities have been paid.

Ideally, over time your company’s balance sheet will reflect your growth through a reduction of liabilities and an increase in owner’s equity.

We can complete our triumvirate of financial statements with a basic balance sheet:

Best Practices for Effective Financial Projections

Like a lot of other business processes, financial planning can be complex, time-consuming, and even frustrating if you’re still using manual workflows and paper documents or basic spreadsheet-style applications such as Microsoft Excel. You can get free templates for basic financial projections from the Service Corps of Retired Executives (SCORE), but even templates can only take you so far.

Without a doubt, the best advantage you can give yourself in creating effective and accurate financial projections—whether they’re for the financial section of your business plan or simply part of your ongoing business planning—is to invest in comprehensive procure-to-pay (P2P) software such as Planergy.

In addition to helpful templates, best-in-class P2P software also provides a rich array of real-time data analysis, reporting, and forecasting tools that make it easy to transform historical data (or market research) into accurate forecasts. In addition, artificial intelligence and process automation make it easy to collect, organize, manage and share your data with all internal stakeholders, so everyone has the information they need to create the most useful and complete forecasts and projections possible.

Beyond investing in P2P software, you can also improve the quality and accuracy of your financial projections by:

• Doing your homework. Invest in financial statement analysis and ratio analysis, with a focus not just on your own company, but your industry and the market in general. Learn the current ratios used for liquidity analysis, profitability, and debt and compare them to your own to get a more nuanced and useful understanding of how your company performs internally and within the context of the marketplace.
• Keeping it real. It can be all too easy to get carried away with pie-in-the-sky optimism when forecasting the future of your business. Rose-colored glasses aren’t exclusive to startups and small businesses; over-inflated estimates can hobble even veteran organizations if they don’t practice good data discipline and temper their hopes with practical considerations. Focus on creating realistic, but positive, projections, and you won’t have to worry about investors or lenders glancing askance at your hard work.
• Hoping for the best, but planning for the worst. Run two scenarios when performing your financial projections: the best-case scenario where everything goes perfectly to plan, and a worse-case scenario where Murphy’s Law holds sway. While actual performance will undoubtedly fall somewhere in between the two, having an upper and lower boundary appeals to investors and lenders who are assessing your company’s financial viability.

Financial Projections Help You Reach Your Goals for Growth

From startups to global corporations, every business needs reliable tools for financial forecasting. Take the time to create well-researched, data-driven financial projections, and you’ll be well-equipped to attract investors, secure funding, and chart a course for greater profits, growth, and performance in today’s competitive marketplace.

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• Building Your Business

How To Create Financial Projections for Your Business

Learn how to anticipate your business’s financial performance

• Understanding Financial Projections & Forecasting

Why Forecasting Is Critical for Your Business

Key financial statements for forecasting, how to create your financial projections, frequently asked questions (faqs).

Maskot / Getty Images

Just like a weather forecast lets you know that wearing closed-toe shoes will be important for that afternoon downpour later, a good financial forecast allows you to better anticipate financial highs and lows for your business.

Neglecting to compile financial projections for your business may signal to investors that you’re unprepared for the future, which may cause you to lose out on funding opportunities.

Read on to learn more about financial projections, how to compile and use them in a business plan, and why they can be crucial for every business owner.

Key Takeaways

• Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more.
• Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to investors.
• Some of the key components to include in a financial projection include a sales projection, break-even analysis, and pro forma balance sheet and income statement.
• A financial projection can not only attract investors, but helps business owners anticipate fixed costs, find a break-even point, and prepare for the unexpected.

Understanding Financial Projections and Forecasting

Financial forecasting is an educated estimate of future revenues and expenses that involves comparative analysis to get a snapshot of what could happen in your business’s future.

This process helps in making predictions about future business performance based on current financial information, industry trends, and economic conditions. Financial forecasting also helps businesses make decisions about investments, financing sources, inventory management, cost control strategies, and even whether to move into another market.

Developing both short- and mid-term projections is usually necessary to help you determine immediate production and personnel needs as well as future resource requirements for raw materials, equipment, and machinery.

Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts. They can also be used to make informed decisions about the business’s plans. Creating an accurate, adaptive financial projection for your business offers many benefits, including:

• Attracting investors and convincing them to fund your business
• Anticipating problems before they arise
• Visualizing your small-business objectives and budgets
• Demonstrating how you will repay small-business loans
• Planning for more significant business expenses
• Showing business growth potential
• Helping with proper pricing and production planning

Financial forecasting is essentially predicting the revenue and expenses for a business venture. Whether your business is new or established, forecasting can play a vital role in helping you plan for the future and budget your funds.

Creating financial projections may be a necessary exercise for many businesses, particularly those that do not have sufficient cash flow or need to rely on customer credit to maintain operations. Compiling financial information, knowing your market, and understanding what your potential investors are looking for can enable you to make intelligent decisions about your assets and resources.

The income statement, balance sheet, and statement of cash flow are three key financial reports needed for forecasting that can also provide analysts with crucial information about a business's financial health. Here is a closer look at each.

Income Statement

An income statement, also known as a profit and loss statement or P&L, is a financial document that provides an overview of an organization's revenues, expenses, and net income.

Balance Sheet

The balance sheet is a snapshot of the business's assets and liabilities at a certain point in time. Sometimes referred to as the “financial portrait” of a business, the balance sheet provides an overview of how much money the business has, what it owes, and its net worth.

The assets side of the balance sheet includes what the business owns as well as future ownership items. The other side of the sheet includes liabilities and equity, which represent what it owes or what others owe to the business.

A balance sheet that shows hypothetical calculations and future financial projections is also referred to as a “pro forma” balance sheet.

Cash Flow Statement

A cash flow statement monitors the business’s inflows and outflows—both cash and non-cash. Cash flow is the business’s projected earnings before interest, taxes, depreciation, and amortization ( EBITDA ) minus capital investments.

Here's how to compile your financial projections and fit the results into the three above statements.

A financial projections spreadsheet for your business should include these metrics and figures:

• Sales forecast
• Balance sheet
• Operating expenses
• Payroll expenses (if applicable)
• Amortization and depreciation
• Cash flow statement
• Income statement
• Cost of goods sold (COGS)
• Break-even analysis

Here are key steps to account for creating your financial projections.

Projecting Sales

The first step for a financial forecast starts with projecting your business’s sales, which are typically derived from past revenue as well as industry research. These projections allow businesses to understand what their risks are and how much they will need in terms of staffing, resources, and funding.

Sales forecasts also enable businesses to decide on important levels such as product variety, price points, and inventory capacity.

Income Statement Calculations

A projected income statement shows how much you expect in revenue and profit—as well as your estimated expenses and losses—over a specific time in the future. Like a standard income statement, elements on a projection include revenue, COGS, and expenses that you’ll calculate to determine figures such as the business’s gross profit margin and net income.

If you’re developing a hypothetical, or pro forma, income statement, you can use historical data from previous years’ income statements. You can also do a comparative analysis of two different income statement periods to come up with your figures.

Anticipate Fixed Costs

Fixed business costs are expenses that do not change based on the number of products sold. The best way to anticipate fixed business costs is to research your industry and prepare a budget using actual numbers from competitors in the industry. Anticipating fixed costs ensures your business doesn’t overpay for its needs and balances out its variable costs. A few examples of fixed business costs include:

• Rent or mortgage payments
• Operating expenses (also called selling, general and administrative expenses or SG&A)
• Utility bills
• Insurance premiums

Unfortunately, it might not be possible to predict accurately how much your fixed costs will change in a year due to variables such as inflation, property, and interest rates. It’s best to slightly overestimate fixed costs just in case you need to account for these potential fluctuations.

Find Your Break-Even Point

The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors.

To find this number, you need to determine two things: your fixed costs and variable costs. Once you have these figures, you can find your BEP using this formula:

Break-even point = fixed expenses ➗ 1 – (variable expenses ➗ sales)

The BEP is an essential consideration for any projection because it is the point at which total revenue from a project equals total cost. This makes it the point of either profit or loss.

Plan for the Unexpected

It is necessary to have the proper financial safeguards in place to prepare for any unanticipated costs. A sudden vehicle repair, a leaky roof, or broken equipment can quickly derail your budget if you aren't prepared. Cash management is a financial management plan that ensures a business has enough cash on hand to maintain operations and meet short-term obligations.

To maintain cash reserves, you can apply for overdraft protection or an overdraft line of credit. Overdraft protection can be set up by a bank or credit card business and provides short-term loans if the account balance falls below zero. On the other hand, a line of credit is an agreement with a lending institution in which they provide you with an unsecured loan at any time until your balance reaches zero again.

How do you make financial projections for startups?

Financial projections for startups can be hard to complete. Historical financial data may not be available. Find someone with financial projections experience to give insight on risks and outcomes.

Consider business forecasting, too, which incorporates assumptions about the exponential growth of your business.

Startups can also benefit from using EBITDA to get a better look at potential cash flow.

What are the benefits associated with forecasting business finances?

Forecasting can be beneficial for businesses in many ways, including:

• Providing better understanding of your business cash flow
• Easing the process of planning and budgeting for the future based on income
• Improving decision-making
• Providing valuable insight into what's in their future
• Making decisions on how to best allocate resources for success

How many years should your financial forecast be?

Your financial forecast should either be projected over a specific time period or projected into perpetuity. There are various methods for determining how long a financial forecasting projection should go out, but many businesses use one to five years as a standard timeframe.

U.S. Small Business Administration. " Market Research and Competitive Analysis ."

Score. " Financial Projections Template ."

How to write a sales forecast for a business plan

Table of Contents

What is a sales forecast?

Why do you need a sales forecast, how do you write a sales forecast, top-down or bottom-up, writing your sales forecast, calculating a sales forecast, how can countingup help manage your forecasting.

Sales forecasts are an important part of your business plan . If done correctly, they can give accurate projections of your business’ cash flow, and let you better prepare for the year ahead. They can also make it easier to find the right investors . While it’s easier for existing businesses with plenty of data, you can still calculate a sales forecast for a new business .

In this guide, we’ll explore:

• How can you manage your forecasting?

A sales forecast is a prediction of your business’ future revenue. In order to be an accurate prediction, the forecast is based on previous sales, current economic trends, and industry performance. Having a sales forecast is a useful tool, because it gives you a better idea of how to manage your business. 

Having a sales forecast is like using the past to have a peek into the future of your company. It might not be 100% accurate, but it can help you plan any future spending, or prevent any cash flow issues from occurring. 

You can also use your sales forecast to monitor your business’ progress. For instance, if your business regularly performs better than your forecast, it could be a sign that your business is continuing to grow. On the other hand, if your actual sales are frequently less than expected, this could be a sign that your business is struggling and needs adjustment. 

It’s important to remember that any projections you make aren’t guaranteed, there can be advantages and disadvantages of financial forecasting . 

Now we’ve run through why having a sales forecast can help you run your business, let’s look at how to write one. 

While there are two types of sales forecasting (top-down and bottom-up), one is a lot more accurate for small businesses than the other. A top-down forecast looks at the market as a whole and attributes a portion of the market to your business. 

A top-down approach may work for large businesses that already own a significant chunk of the market. When forecasting for a small business, it’s easy to overestimate your market share. For example, a 1% market share may not seem like a lot, but a small restaurant owning 1% of the £89.5 billion UK market is extremely unrealistic.

The alternative to top-down is bottom-up. A bottom-up sales forecast starts with existing company data (like customer or product information) and works up to revenue. Since this starts with the company, it’s easier to 

Your sales forecast is ultimately a prediction of your revenue over a set period. It considers the amount you think you’ll sell, and the cost of those sales. We’ve included how to calculate a sales forecast below.

A sales forecast consists of three separate values: revenue, cost of goods sold, and gross profit. For estimating values in the calculations below, it’s best to use any existing business data to be as accurate as possible. 

To calculate your predicted revenue:

• Make a list of your available goods and services
• Note the price of each of your goods and services
• Estimate the expected sales of each good or service
• Multiply the price by the estimated sales to get your estimated revenue
• Add them all together to get your total revenue

For example, if your food truck business sold pizzas at £10 and burgers at £5, you would multiply these values by how much you expected to sell. For calculating a weekly sales forecast, you might estimate selling 60 pizzas and 80 burgers. Your predicted revenue for that week would be £600 for pizzas and £400 for burgers — giving £1,000 total.

In order to figure out how much profit you’ll make, you also need to calculate your costs for those predicted sales. To calculate your predicted costs:

• Figure out how much each good or service will cost per unit
• Multiply each cost by the projected sales

Using the same example as above, assume a single pizza cost £3.50 to make and a burger cost £2. Using the estimated sales, the total cost for your pizzas (3.5 x 60) would be £210, and £160 for your burgers (2 x 80). Combining these two figures gives you a total cost of £370.

The last step is to work out your gross profit , and it’s a relatively simple calculation.

• Subtract the total predicted cost from your total predicted revenue

Continuing with the example above, your revenue (£1,000) minus your costs (£370), leaves you with a projected gross profit of £630 for the week. Using this estimate, you can then plan how much working capital your business should have access to. It’s important to remember that these are only estimates, and your actual values can be higher or lower than your forecast.

If you want your forecasts to be as accurate as possible, you need to refer to all of your business’ financial data. Since collecting and collating this data can be challenging, you may want to use financial management software like the Countingup app. 

When trying to calculate your sales forecasts, having an up-to-date log of your current sales can be hugely beneficial. By combining a business current account with accounting software, Countingup is the only software that provides real-time cash flow tracking. 

The Countingup app also provides business owners with access to automatically generated profit and loss statements. These can prove invaluable when trying to stay aware of all your business’ costs.

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Financial forecast example for new businesses and startups

The financial forecast is an essential step when creating a business plan. The financial forecast allows you to anticipate the revenues and expenses of your new business over a given period.

Even if the exercise is sometimes delicate to carry out, it is nevertheless essential for any entrepreneur. Indeed, it allows you to define quantified objectives, which, if meticulously tracked, will allow you to grow your business in good conditions.

To help you, here's a financial forecast example as well as tools you can use to create yours. 

Financial forecast examples for new businesses

Example of a sales forecast.

The sales forecast is used to estimate the company's turnover. It is generally presented by category of products and services, types of customers, or time slots.

In our financial forecast example, we have included below a sales forecast for a hostel, organised by categories of services with the bed's occupancy forecast broken down based on seasonality:

To ensure a fair and realistic evaluation of your company's revenues, You will need to base your forecast on thorough and reliable market analysis, including an analysis of what your competition offers. You will also need to think carefully about your pricing policy and distribution strategy beforehand.

Examples of financial statements to include in your forecast

Your forecast will need to include 3 financial statements:

• The P&L statement
• The cash flow statement
• The balance sheet

P&L statement

The profit and loss statement enables you to assess:

• the growth of the company by analyzing the evolution of the turnover over several years;
• the profitability of the company by looking at the difference between the expected revenues and the costs which will need to be incurred to generate these sales.

The main shortcoming of the projected income statement is that it does not take into account cash flows. Your profits should turn into cash at some point, but based on when your clients pay you, how much inventory you keep, or when you pay your suppliers, the cash flow could be very different from your profit.

To overcome this shortcoming, we need to look at the forecasted cash flow statement included in our financial forecast example.

Cash flow statement

The cash flow statement shows all anticipated cash movements for a given year.

It enables you to evaluate:

• the ability to generate operating cash flow;
• the company's investment and financing policies.

The cash flow statement is highly complementary to the P&L statement. Together they provide a clear view of the company's profitability, the cash generated by the operations, the investments made and the financing flows.

Balance sheet

The forecasted balance sheet, the last link in the chain, provides an overview of the company's net worth at a given moment in time and is part of our financial forecast example. It enables you to evaluate:

• the value of the company's assets;
• the weight of its working capital;
• the level of financial indebtedness;
• the book value of shareholders' equity.

The forecasted balance sheet complements the other two tables. Nevertheless, it has two weak points:

• It provides a snapshot of the company's net worth at a specific moment in time - giving a very static view of the company. Especially given the balance sheet is usually produced several months after the end of the financial year (and therefore the information it contains is already stale!)
• It gives an accounting vision of the company, based on historical cost, and not a financial vision, based on market value.

Where can I find other financial forecast examples?

At The Business Plan Shop, we offer an online software that includes a financial forecasting tool and helps you throughout the drafting of the business plan on top of financial forecast examples included in our business plan templates . 

Using a software like ours to realize your business plan has several advantages:

• You can easily create your financial forecast by letting the software take care of the calculations and financial aspects for you.
• You are guided in the drafting process by detailed instructions and examples for each part of the plan.
• You get a professional document, formatted and ready to be sent to your bank or investors.

If you are interested in our solution, you can try our software for free here .

Our article is coming to an end. We hope that our financial forecast example has given you a better understanding of what this exercise is all about.

The forecast is a crucial element of a business plan that will be of particular interest to your financial partners if you are looking for financing; but don't forget that it is also a mean for you, as an entrepreneur, to evaluate the viability of your new business idea.

Also on The Business Plan Shop

• How to do financial projections for a new business?
• How to establish a Profit & Loss forecast in your business plan?
• How to do a financial forecast for a restaurant?

Founder & CEO at The Business Plan Shop Ltd

Guillaume Le Brouster is a seasoned entrepreneur and financier.

Guillaume has been an entrepreneur for more than a decade and has first-hand experience of starting, running, and growing a successful business.

Prior to being a business owner, Guillaume worked in investment banking and private equity, where he spent most of his time creating complex financial forecasts, writing business plans, and analysing financial statements to make financing and investment decisions.

Guillaume holds a Master's Degree in Finance from ESCP Business School and a Bachelor of Science in Business & Management from Paris Dauphine University.

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How to create a sales forecast for your small business

July 25, 2023 | 7 minute read

What you know about tomorrow can help you make better decisions about running your small business today. A sales forecast can be a helpful tool in estimating future sales, so you can take that information into account in your planning. Simply put, a sales forecast estimates the quantity of goods and services you can reasonably expect to sell over a specified period, the cost of those goods and services and the potential profit. It’s based on your sales in the past, industry benchmarks and market conditions. 

A sales forecast is an invaluable tool for better  managing your cash flow , spending, staffing and more. Once you complete your forecast, you’ll have a better sense of what’s driving your revenues and profits, know where to put your time and resources and be able to identify efforts that are not fueling growth so you can consider eliminating them. 

Why sales forecasting is important

A sales forecast helps you understand your financial position. It can be a good starting point for setting goals and provides guidance in many areas of your business, such as planning for new hires, purchasing inventory and equipment, knowing when to preserve cash, increasing your marketing budget or alerting you that you need to find new  ways to make more money . It can also help you illustrate your business’s potential to investors.

What factors impact a sales forecast?

A forecast is really an educated guess. There are any number of conditions that might shake up your projections, such as new laws and regulations. A downturn in the economy could mean a change in business conditions, making it harder to get credit. A dip in consumer confidence could lead to less spending on your company’s goods and services. New competition in your market, a drop in customer satisfaction or extreme weather (a major storm that essentially shuts down a city for a few days, for example) could all make a difference in what you thought was going to happen. Something like seasonality can also impact your forecast. Internal factors like new production processes and procedures can also keep you from hitting your target. 

Sales forecasting methods

There are several methods to creating a sales forecast. Here are three that many small businesses use:

Historical forecasts

This method is based on your business’s past performance. If you’ve been in business for a year or more, you can look back at data by the week, month, quarter or year. If you’ve launched your business recently, this option won’t work well because you won’t have enough data available. 

Bottom-up forecasts

To come up with these forecasts, you must project the number of units you will sell, then multiply that figure by the average cost per unit. If you run a larger small business, you can also include metrics like the number of locations, sales representatives or online interactions. The rationale behind a bottom-up sales forecast is to begin with the smallest components of the forecast and build up from there. The advantage of this type of forecast is that if any variables change (like cost per item or number of reps), the forecast is easy to adjust. 

Top-down sales forecasts

Start with the total size of the market and estimate what percentage of the market the business can capture. If the size of a market is $20 million, for example, a company may estimate it can win 10% of that market, making its sales forecast $2 million for the year. If you’re a natural optimist, it’s a good idea to ask an advisor to provide a reality check on the percentage of customers in your market that you can reasonably expect to attract and serve so that your projections are more accurate. 

How to create a sales forecast

Once you’ve selected a sales forecasting method, you’ll want to take several steps.

1. List the goods and services you sell

In a sales forecast, you’ll want to account for each product or service that you are selling so your forecast is accurate. 

2. Quantify your sales

Each sales forecasting method has its own way of estimating future sales: 

In  historical forecasting , you will need to project the quantity of each product or service you will sell and multiply the unit price by that number. In this type of forecasting, you can base your estimate on the sales figure you brought in last month as long as nothing major has changed in the marketplace. So, if you sold $50,000 worth of your product in July, you might estimate selling $50,000 worth in August. 

In  bottom-up forecasts , you must first estimate the total number of orders that customers will place for your products or services through your website, social media channels and other places you make sales. Then you estimate the average price minus any discounts you offer. Finally, you must multiply the estimated number of orders for each item by the average price to get estimated revenue. 

In  top-down forecasts , you start by estimating the total market for each item you sell. For example, if you were lucky enough to capture 100% of the sales, how much would you have sold? Then project how much of that market you can realistically capture. So, for instance, if the total addressable market for what you sell is $1 million, and you capture 7% of that with your product, your estimated sales will be $70,000. 

3. Make adjustments

Some owners adjust their forecasts to reflect projected market conditions, regulatory changes, new marketing efforts and other variables.

4. Subtract costs

Business owners will typically subtract the costs of creating each good or service they sell from their estimated sales forecast to understand how much profit would be generated from sales. Let’s say you sell a backyard game you invented by outsourcing the manufacturing to a local factory. You might subtract  overhead expenses , such as paying the factory and buying materials, from your projected revenue to anticipate how much money would be left over as profit. Or if you run a social media agency that has taken on new clients who’ve hired you on retainer, you might subtract costs, such as paying freelancers to write social media posts and subscribing to a website that provides stock photos, to get a clearer picture of future profits. 

Tools for sales forecasting

If you haven’t done so already, you might want to consider software to help with sales forecasting. 

Sales forecasting software

Sales forecasting software can use historical business data and trends to create a report of expected sales revenue. Forecast reports can compare sales targets with actual sales. 

Ideally, sales software can help you answer questions like: 

What is your expected revenue? 

Which forecasting method produces the most accurate forecast for your business? 

How did actual sales compare to expected sales?

Sales pipeline forecasting software

With sales pipeline forecasting software, you’ll get an analysis of existing opportunities and a calculation of your success rate in pursuing them, helping you prioritize your efforts. This method focuses on pipeline management and calculates a historical win-rate percentage based on the value and age of the opportunity and the sales representative working on it. Some software programs include features that will give you the ability to view pipeline activity and internal sales data or save you time, letting you integrate information from third-party sales software, for instance. You can create sales forecasts using software such as QuickBooks, Salesforce Sales Cloud, Zoho CRM and Pipedrive.

Historical sales forecasting software

Historical sales forecasting software analyzes previous company performance to calculate a mean (or average) sales level you can expect for the following month, quarter or year. It emphasizes historical trends and seasonality of products and services sold, but it does not consider the opportunities in your pipeline. This software is ideal for small businesses that don’t have big swings in their monthly sales. 

Bottom line

Your sales forecast can be a vital tool as you make plans to grow your business or adjust to challenges. By comparing your actual performance to your forecasts, you’ll be able to get a clear handle on your success and failures, fine-tune your strategies and capitalize on what is working for you so you can keep your business moving to the next level. 

Explore more

Cash flow management basics for small businesses

How to write an effective business plan

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Federal Reserve keeps interest rates at current levels as inflation holds its grip

The Federal Reserve left its key interest rate unchanged at between 5.25% and 5.5% — the highest level in more than a decade — as annual inflation rates continued to stall.

In its statement announcing the hold, the central bank said that in recent months, there had been "a lack of further progress" toward its 2% percent inflation goal.

"Economic activity has continued to expand at a solid pace," it said. "Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated."

Last month, the consumer price index came in at 3.5% on an annual basis, driven by rising housing costs and insurance rates, especially auto insurance.

"We're just a mile a way from the finish line," said Mark Zandi, chief economist at Moody's, referring to the economy reaching 2% inflation. "We're very close, but still not there. I do think that inflation will continue to moderate."

The Fed has sought to slow inflation by keeping interest rates elevated. By making it more expensive for businesses and consumers to borrow money, including through credit cards, the Fed hopes to reduce demand for goods and services, thereby reducing price growth.

So far, the results of doing this have been mixed. After a period of rapid interest rate hikes, the pace of inflation fell from more than 9% in the summer of 2022 to its current levels of between 3% and 4%.

But the decline has since stalled.

There are complex reasons for the lack of progress and many elements may actually be out of the Federal Reserve's control. Home and auto insurance companies continue to pass on higher costs to consumers . Meanwhile, even as many consumers struggle, post-pandemic wealth gains have left others — especially older consumers — with plenty of money to spend, despite higher prices.

Whatever the case, the wait for slower inflation has left the average consumer in an increasingly dour mood. On Tuesday, the Conference Board’s monthly Consumer Confidence Index came in at its lowest level since July 2022. Consumers expressed more concern about the current labor market situation, future business conditions, job availability and income, the group said.

Still, most analysts say the odds of a recession are remote. In the most recent GDP report, spending on services, which includes everything from restaurants to airfare to professional services, came in at 4% year-on-year, the fastest rate since 2021.

“Don’t underestimate this economy,” economists with Wells Fargo said in a report following the release.

Consumers thus appear to be sensing that the most crucial part of the economy — the jobs market — is slowing, even while prices remain elevated.

Fed Chair Jerome Powell acknowledged this complex economic environment in remarks in early March.

"The outlook is still quite uncertain," Powell said. The central bank must balance its campaign against elevated inflation with ensuring the economy does not slip into a recession.

Economists like Zandi aren't expecting the Fed to raise interest rates, either.

Instead, the Fed will likely continue to keep rates elevated — perhaps even until after the November general election so that it does not appear to favor one candidate or another.

"[Powell's] message is clear: We can’t cut rates and we’re not there yet," Zandi said. "We've still got a ways to go."

Rob Wile is a breaking business news reporter for NBC News Digital.

Watch CBS News

Social Security projected to cut benefits in 2035 barring a fix

By Aimee Picchi

Edited By Alain Sherter

Updated on: May 7, 2024 / 11:28 AM EDT / CBS News

The timeline to replenish Social Security is being extended. The federal retirement program said Monday it may not need to cut benefits until 2035, one year later than previously forecast, because of stronger performance by the U.S. 

The new projection, from the Social Security Board of Trustees' annual report,  amounts to "good news" for the program's 70 million beneficiaries, said Martin O'Malley, Commissioner of Social Security, in a statement. Even so, he urged Congress to take steps to shore up the program to ensure it can pay full benefits "into the foreseeable future."

Social Security relies on its trust funds to provide monthly checks to beneficiaries, with the funds primarily financed through the payroll taxes that workers and businesses provide with each paycheck. But the funds' reserves are drawing down because spending is outpacing income, partly due to the wave of baby boomer retirements and an aging U.S. population. 

Experts underscore that if the trust funds are depleted, benefits won't suddenly disappear. Instead, Social Security beneficiaries will face a cut to their monthly checks, with the agency on Monday projecting that recipients would lose 17% of their current benefits.

That would be painful for millions of retired and disabled Americans, but it represents a modest improvement from last year, when the Social Security Administration projected that benefits could be slashed by 23% if the trust funds reached the point of depletion.

Advocates for older Americans praised the improved outlook, while pressing Congress to take action on shoring up the program. 

"Congress owes it to the American people to reach a bipartisan solution, ensuring people's hard-earned Social Security benefits will be there in full for the decades ahead," AARP CEO Jo Ann Jenkins said in a statement. "The stakes are simply too high to do nothing."

Lawmakers have yet to take action despite being aware of the looming funding crisis, noted Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a think tank that focuses on the federal fiscal policies, in a statement.

"Every year we get closer to the deadline, we seem to get further away from the solutions," she said. Without a fix, "Social Security's retirement trust fund will be insolvent when today's 58-year-olds reach the normal retirement age and today's youngest retirees turn 71."

Economic boost

O'Malley attributed the improved Social Security forecast to the stronger economy, pointing to what he called "impressive wage growth, historic job creation, and a steady, low unemployment rate." In other words, a healthy job market is resulting in more Social Security taxes going into the funds' coffers.

The report comes as Social Security's financial outlook has become a political lightning rod, with Republicans proposing that the retirement age be raised — effectively cutting benefits for millions of current workers — and former President Donald Trump indicating he would be open to cuts to Social Security and Medicare. 

Democrats argue that there are other ways to fix the program without cutting benefits, such as raising the cap on payroll taxes. Currently, individual income over $168,600 is exempt from the Social Security payroll tax. 

Medicare's "go broke" date

Meanwhile, Medicare's go-broke date for its hospital insurance trust fund was pushed back five years to 2036 in the latest report, thanks in part to higher payroll tax income and lower-than-projected expenses. Medicare is the federal government's health insurance program that covers people age 65 and older and those with severe disabilities or illnesses. It covered more than 66 million people last year, with most being 65 and older.

Once the fund's reserves become depleted, Medicare would be able to cover only 89% of costs for patients' hospital visits, hospice care and nursing home stays or home health care that follow hospital visits.

In a statement on Monday, President Joe Biden credited his administration's economic policies for Social Security and Medicare's stronger outlook. 

"Since I took office, my economic plan and strong recovery from the pandemic have helped extend Medicare solvency by a decade, with today's report showing a full five years of additional solvency," he said. "I am committed to extending Social Security solvency by asking the highest-income Americans to pay their fair share without cutting benefits or privatizing Social Security."

—With reporting by the Associated Press.

• Social Security

Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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Too many tractors: As boom times fade, farm equipment piles up

Falling crop prices are leaving agriculture equipment sellers with an excess of unsold tractors and combines. To cope with the surplus, dealers are discounting machines, suspending new orders, and even auctioning off equipment at reduced prices.