7 Tips for Business Forecasting
What is your business going to spend next year? What do you think you'll bring in? When do you think that money will actually reach your bank account? How are sales going to flow and ebb? Forecasting for sales and cash flow is never simple, and the shaky economic recovery is making attempting to create an accurate forecast even more perplexing. We've talked to CEOs who say it's not impossible to forecast effectively, and we've compiled their smartest advice from Inc. articles and Inc.com guides.
1. Plan for the worst, but project for the best, too.
To be prepared to at least break even in tough times, but also be ready for growth, Orb Audio CEO Ethan Siegel makes three different spreadsheets for his high-end speaker manufacturing business, Donna Fenn reports. "We try to walk the fine line of making sure we are profitable if the worst case comes true, but also have enough product and staff to support the best case predictions," says Siegel, whose company is based in New York City. This year, the company grew by 30 percent, with growth fueled largely by foreign sales driven by a weak dollar. "We never would have guessed that we'd grow that much," says Siegel. "But because we also planned for best case and built up inventory, we weren't caught with our pants down." In the short term, Siegel looks carefully at the month-to-month growth rate in the previous year to predict revenue in the coming months. "It's been very accurate for us since speaker sales do tend to follow a seasonal pattern," he says. "People are more likely to spend their money on indoor entertainment in cold months." Read more.
2. Out with the old, in with the new.
Don't let your annual forecast go stale, recommends Seventh Generation's Jeffrey Hollender. He says a once-a-year forecast doesn't hold up well in uncertain economic times. It might be wise to "consider pushing your annual forecast back to later in the year," he says. "We used to do our forecast in August but now have pushed that all the way back to November. And in the past six months, we've created a new forecast almost monthly. Creating that many new forecasts can take a lot of time, but sometimes it's necessary. In the end, you don't want to run a business off of a forecast you no longer have confidence in." Read more.
3. Keep your customer terms updated.
"For the first four and a half years of this business, we'd have the occasional customer who ran into a slowdown. Now, that unstable group is much bigger," says Dennis Brown, CEO of Logistic Dynamics, an Amherst, New York, logistics coordinator. "This year, we are a lot more conservative in our methodology because of the unknown. We've tightened our credit terms to our customers. We know this year, somebody significant is going to file bankruptcy on us. Statistically, it's going to happen. Therefore, our forecasts have to be more conservative, because we need to be able to subsidize that kick in the pants we know we are going to get. It may be only $30,000, but it may be $300,000. That would hurt bad. We're hoping it's $30,000." Read more.
4. Plan discounts ahead of time
There are two primary types of discounts a retailer might take: Promotional discounts during the season and clearance markdowns as the season winds down. Planning these discounts goes hand in hand with planning sales and inventories if you are using retail value as your unit of measure. "A discount, just like a sale, decreases the retail value of your inventory on hand," says Ted Hurlbut, the principal of Hurlbut & Associates, a merchandising and inventory management consulting firm based in Foxboro, Massachusetts. Keep in mind that any retailer needs to protect gross margins and cash flow when planning clearance markdowns. "If you plan the date of the first seasonal markdown before the season even begins," Hurlbut says, "you can plan the inventory you want to have on hand at that point in time, and thus your markdown percentage. If you've planned sales by month, ending inventories by month, and discounts by month, it's easy to calculate how much inventory to bring in each month, by category. Hurlbut says retailers need to bring in enough to cover that month's planned sales, planned discounts, and planned ending inventory, less the prior month's planned ending inventory. "In this way, for example, a buyer can know before a season begins how much inventory to plan on bringing in each month of the season," he says. Once inventory receipts have been planned, the next step is to plan how to execute those receipt plans. Ask yourself: How much of my receipt plan do I want to commit to buying now, before the season begins? Read more.
5. Keep your sales team constantly involved.
At the beginning of each fiscal year, the leadership team at T3, a $35 million Austin-based advertising agency, takes a stab at forecasting sales for the entire year. But every month, the company adjusts those numbers based on input from eight to 10 account directors. At the end of each month, Charles Kiley, the firm's CFO, sits down with those directors to compare invoices to the forecast, plots a trend line, and reports back to senior management, including chief executive Gay Gaddis. At that point, the team makes a "buy, hold, or sell" decision on hiring and expenses. Read more.
6. Know thyself, and know thy customers.
The secret of a good cash forecast is knowing your business: knowing your customers' payment habits and your own, writes Denise Bedell, as part of Inc.com's Business Owner's 2011 Budgeting Tool Kit. When gazing into the crystal ball and attempting to forecast expected incomings and outgoings, cash flow rarely—if ever—ends up acting exactly how you expect. But the better you know your own business and your customers, the more accurate the forecast will be. Read more.
7. Pay attention to the small stuff. Like paperclips.
"I've always felt that the office supply business is a pretty good bellwether of the economy. If people are buying lots of supplies, then businesses are doing pretty well," Rick Israel, co-founder of Complete Office, a Seattle supplier of office products, told Inc.'s Kasey Wehrum. "If they are buying new office furniture, then they are doing even better. Our furniture business has dropped by about half, but right now, we're not seeing huge declines in supplies. Supplies are like food: People still need to eat, and businesses still need to run copies and go through toner. But we are starting to see a trend of businesses buying just the things that are absolutely necessary. If you want a fancy binder or a cool new pen, you're not getting it." Read more.