The Importance of Small Business Forecasting

One of the biggest challenges many small businesses face is having enough cash on hand to grow or ramp up their business. There is a huge variance in the sophistication of business owners when it comes to financing alternatives. From the shoebox approach to full-time CFOs and outsourced bookkeeping services, the range is quite staggering.

However, even those who are more sophisticated often do not know how to get the most from their software or utilize any sort of forecasting. It is very hard to make any decisions from building a website to adding staff without knowing what might be coming in over the next few months or years.

How Does Your Small Business Cash Flow?

Businesses vary quite a bit in types of revenue, profitability, recurring revenue streams, new client acquisitions, pricing, profitability, etc. You may have existing repeat customers who continue to set a base level of revenue. Perhaps the business has core clients who can be sold multiple types of products or services. Or you may have some type of product or service which is renewable. Any of these examples helps a business set a base level of revenue, which gives the business owner more predictability and the ability to spend time courting additional business and adding to their team. 

Other businesses are very seasonal, such as plowing, landscaping, painting, pool services, etc. Typically, if this type of business offers a competitive service, is professional and has a core group of clients, referrals will continue during the busy season. The challenge is how to manage the off-season. (For related reading, see: In Small Business, Success Is Spelled With 5 Cs.)

 Smaller businesses may not know where the next client will come from or what services they will agree to purchase. This type of business is typically scrambling from one new client to the next as they execute and then come up for air to try to find the next new client. The cycle repeats and it is very difficult to get ahead.

Build a Business Forecast

The simplest way to build a forecast is by using Quickbooks. If you have been using an accounting software, your outsourced bookkeeper, an accountant or CPA can tutor you on how to use it or you can watch a how-to video to teach yourself. If you have several years’ worth of data in the system, you will be able to see a wealth of information, including profitability, average revenue per client, etc. (For related reading, see: The Basics of Business Forecasting.)

With these reports you can analyze your business, notice the changes you have made over the past few years, and decide if that is the path to continue. You may notice certain clients picked up orders at specific times of the year and you may be able to anticipate this demand going forward.

With forecasts, you can determine if you need financing and if so, how much. A forecast should be the beginning of a business plan, which combined with a marketing strategy creates an outline for success.

If you have not utilized any type of reporting software, one way to achieve some clarity is to go through your invoices and figure out your top 10 clients. What did they order? Where did they find you? Or where did you find them? What products or services did they utilize and would you replicate this client if you could?

This process will give you information you may be overlooking. You can use this to begin to draft a marketing plan to replicate the best clients. Set up a dedicated effort to add new clients in the next quarter, track the results and analyze them at the end of each month. Spending a few minutes doing this each month is worth its weight in gold as you will begin to see patterns. With diligence, you will find yourself growing and able to predict how many new clients you may close in the following two quarters or full year and give yourself the ability to invest in yourself!

(For more from this author, see: Why Your Family Business Needs a Succession Plan.)