It can be difficult for small businesses to forecast one year of financials, let alone multiple years accurately because there are many variables and unknowns at play, especially if it is a pre-revenue startup. If you want to avoid making costly errors in your forecasts and build a defendable, realistic plan that you can get your organization, partners, and other shareholders behind then read this article! This blog post will cover 12 mistakes to avoid when forecasting sales, expenses, and cash flow.
Mistake #1: Not Forecasting at All
This is the biggest mistake a small business can make when it comes to financial forecasting. If you don’t have a plan, then any course of action you take is essentially shooting in the dark. You may be lucky and hit your targets, but more likely you will miss them and end up with disappointing results. Worse yet, without any kind of forecast or planning process in place, you might not even realize that things are going off track until it’s too late.
Mistake 2: Not Having a Robust Process in Place
One of the biggest mistakes small businesses can make is not having a robust forecasting process in place. This means having defined steps for how forecasts will be created and updated on an ongoing basis, as well as who is responsible for each task. Without this kind of framework, it’s easy to get off track or with disappointing results. Worse yet, without any kind of forecast or planning process in place, you might not even realize that things are going off track until it’s too late.
Multi-year forecasting is more complex than just projecting one year at a time. This means building in assumptions about revenue growth, market demand, and other variables based on what you think might happen in future years when making your projections for each period. If these assumptions don’t come true it can lead to inaccurate forecasts which could result in poor business decisions being made if they are left unaddressed.
Many times when small businesses fail to have a robust process in place, it leads to oversimplifying the forecasting process which can result in unrealistic predictions. When breaking down a forecast into its component parts it’s important to use realistic estimates based on historical data where possible and err on the side of caution rather than optimism when making projections. Trying to do too much with limited information can often lead to inaccurate results.
Once you have a forecast in place it’s important to monitor it on an ongoing basis and make any necessary adjustments as required. This can be done with the help of financial software which is designed specifically for this purpose. If your forecasts aren’t monitored regularly, then they might not provide you with all the information that you need to run your business effectively.
Mistake #3: Failing to Account for Uncertainties and Variables
One of the main challenges in forecasting is accounting for all the uncertainties and variables involved. Things like future market conditions, changes in the competitive landscape, new regulations and taxes are just a few that can dramatically affect forecasts. If you don’t factor these things into your forecast then any projections will be based on little more than wishful thinking.
Mistake #4: Not Justifying Forecasts with Facts & Data
Another common mistake is not justifying forecasting numbers where possible. This means including explanations why certain variables have been projected to grow or shrink at the rates being suggested as well as inserting supporting data where available such as historical figures or industry averages which provide an indication of relative size/scale between businesses within this market segment. It also shows you have done some research and considered how realistic your forecasts are given what is known about the market.
Mistake #5: Underestimating Costs and Overstating Revenues
Forecasting is not just about estimating future revenues, it’s also important to get a good handle on expected costs. This includes everything from fixed costs like office space or manufacturing overheads, to variable expenses related to the products or services you offer. Often businesses will underestimate how much these things will cost which can lead to cash flow problems down the road if revenue growth doesn’t meet expectations. Conversely, some businesses tend to overestimate their revenues which can lead to inflated profit forecasts that are ultimately unsustainable.
Mistake 6: Failing to Anticipate Seasonal Fluctuations
Most businesses experience seasonal fluctuations in revenue and/or costs. Things like holiday periods, when people tend to take more time off work or buy presents for loved ones will generally result in a lull in business activity over this period. Conversely, certain businesses such as retailers see their best sales come during the holidays due to increased demand so it’s important not to assume all months are equal in terms of revenue generation.
Mistake #7: Over-Reliance on “What If” Scenarios & Analysis
Many business owners find themselves spending a lot of time analyzing different scenarios and figuring out how they might work. This is all well and good but overdoing this type of analysis can be problematic as it tends to move your focus away from what you actually know (i.e., the facts) towards more subjective areas that may or may not prove to be accurate in reality. For example, if you are trying to figure out how much revenue will come through based on potential changes in market conditions such as price etc., then there's no way for you to realistically estimate these things with any degree of certainty before you begin to even operate.
There is a fine line between using scenarios and analysis to help you make better decisions and over-relying on this type of subjective analysis which can lead to bad forecasting results.
Mistake #8: Failing To Account For Risk Factors or Forecasting Errors
One of the most common mistakes business owners make when it comes to forecasting sales revenue is failing to account for risk factors related to their specific industry, market segment, etc. This includes things like potential costs associated with compliance requirements if selling certain products into new markets overseas, or changes in credit terms that might impact your customers’ ability/willingness to pay down debts owed at agreed-upon intervals going forward, etc., It also means not just assuming everything will go as planned and that you will be able to hit your targets without any issues. There are always going to be factors over which we have little or no control, so it’s important not only to acknowledge the potential impacts of these things (even if they seem unlikely) but also to make allowances for them when creating forecasts to avoid unpleasant surprises further down the line.
Mistake #9: Letting Your Personal Biases Influence Forecasts
One common mistake small business owners make with respect to their financial projections is letting their personal biases influence how accurate those projections end up being. For example, a business owner might like certain products/services better than others and thus base revenue growth rates on this preference rather than industry averages, etc. The problem with this is that it introduces a high degree of uncertainty into what should be a more objective process.
The best way to avoid this mistake is to have someone else (ideally an outsider) take a look at your forecasts and provide feedback on how realistic they appear from an unbiased perspective. This can help you to get a better idea of whether or not your projections are grounded in reality or simply based on personal preferences which may or may not pan out in the long run.
Mistake #10: Failing To Update Forecasts Regularly & Accurately
Business owners often fail to update their financial forecasts regularly, resulting in outdated information being used when making important strategic decisions. Not only does this introduce bias into decision-making processes, but it can also lead to inaccurate assumptions about future business performance being used which can cause serious problems further down the line.
The best way to avoid this mistake is to set a schedule for regular forecasting updates and make sure everyone involved in the process (e.g., management, accountants, etc.) understands their role in ensuring that these forecasts are as accurate as possible. This will help ensure that your projections remain relevant and useful for making informed decisions about the future of your business.
Mistake #11: Not Considering Long-Term Trends
It’s also important to consider long-term trends when forecasting. This could be anything from changes in technology that might affect your industry, to broader socio-economic factors such as population growth or levels of disposable income. Ignoring these can lead to faulty assumptions and inaccurate forecasts.
Mistake #12: Not Discounting Your Cashflow Projections
Another common mistake business owners make when forecasting their cash flow is not discounting their projections. This means that you are assuming that all of your projected revenues and expenses will happen at exactly the same time, which is rarely the case in reality. To account for this, it’s important to use a discounted cash flow analysis that takes into account both the timing and amounts of your projected revenue and expenses.
This can help you to get a more realistic view of how your business is likely to perform financially over different periods, allowing you to make better-informed decisions about where to allocate your resources (e.g., capital investments, hiring new staff, etc.) going forward.
Bottom Line
Forecasting can be a challenging task, but it doesn’t have to be an impossible one. By following the best practices, and avoiding the top mistakes outlined in this post you should be able to create more accurate forecasts that will help guide important business decisions and provide useful insight into your future financial performance over different periods.
Financial forecasting is a foundational part of any business plan as it connects to the strategic objectives of your company, and is one critical, intertwined element of your balanced scorecard. Feel free to read more about business planning, or goal setting in our blog section.
At IMG Consulting, we fancy ourselves as small business financial wizards of sorts. If you find that you need help in reviewing your forecasts or guiding you through the process altogether, let's connect. We are happy to help!
