Budgeting is one of the core functions of running a small business, but one aspect of good budgeting sometimes goes overlooked: forecasting. Forecasting is the art of accurately predicting future revenue and expenses in order to make informed decisions about your business. Budgeting and forecasting are not exactly the same, since running a budget uses information you already have to find out how you’re doing now, while forecasting uses reasonable estimates to predict how you’ll be doing later, but these related techniques draw a lot from each other, and skill in one can often translate into skill at the other. In general, your current budget is a good guide to your day-to-day operations, while forecasting is especially helpful when you’re planning ahead.
One time when you definitely need an accurate forecast is during the run-up to a new product launch. This is usually a fraught time for a small business, since a bad launch can be a real problem for a company with most of its eggs in one basket. Accurately predicting conditions in this case can save a world of trouble during the planning and execution stages.
Say you’re planning to roll out a new kind of tongue depressor that you hope will sweep the medical supply field, but it requires a third of your budget to bring the product to market. If you have reliable forecasts based on previous success with this type of rollout, existing demand for your new model, the popularity of competing models, and a clear picture of how much end users are ready to pay for the product, then you should have a notion of how long it will take to realize a profit, however small. That information can drive you to go ahead with the launch on schedule, take out a business loan as a buffer for the slow growth curve you expect, or delay the launch until the quarterly profits are in and you have a little more money in the bank.
Businesses have their ups and downs, and small businesses like yours feel the bad times far more acutely than international conglomerates. Riding it out when things are slow can be hard, but it’s even harder to plan realistically for the good times ahead when all you can see in a recession is miles of dark tunnel stretching ahead of you. Being able to forecast the return of boom conditions in your industry, if not for your particular company gives you a critical leg up during your roughest times.
For instance, if your company distributes soy to Argentina, you might have it rough when the price of beef falls in the Pampas. Your company, and all the other international soy distributors, may be hurting. Forecasting the end of the slump gives you a chance to invest in new infrastructure and hire new drivers a few weeks or months before prices shift and your business picks back up.
You Can Go
Forecasting is helpful on a much smaller scale than import-export soy futures. Any business with employees knows that there are good times for workers to take their vacation and bad times to be shorthanded. Reliably forecasting those cycles helps balance the company’s needs of productivity with the workers’ needs for suntans on the beach.
Say you have a holiday-heavy business such as licensing the rights to popular Christmas carols. You’re probably going to be busy in November and December, with a bit of slack starting in January. If you understand this annual cycle, you can schedule your hiring, layoffs, vacations, and training cycles for when they’re most advantageous.
Budgeting and forecasting are both vital skills for a small business to master. Accurate forecasting gives insight into likely future events and confers a possibly decisive advantage on your company.