For small business owners, there are fewer things more important to long-term success than managing their finances effectively. The best way to understand a business’s finances is to create a financial forecast — a prediction, based on past performance and future expectations, of how a business will do financially.
But while creating initial revenue, expense and cash flow forecasts are a great start, the real secret to staying on top of their business finances is to regularly update them.
Many businesses fall into the trap of creating a forecast once, and then letting it sit and gather dust. Anyone who does this gets only a small fraction of the benefits of forecasting. By consistently updating financial forecasts, business owners are able to adapt quickly to shifting trends, make informed decisions and stay ahead of potential challenges.
In this article, we’ll explore why updating your forecasts is so important, what to focus on when updating them, and how to implement a regular updating process in your business.
Why Regular Forecast Updates Matter
Conditions can change rapidly for a business. Business owners can get a quick boost by entering a new market or having their business discovered on social media. On the other hand, they can lose a key customer, or make purchasing mistakes that lead to excess inventory.
These are all examples of situations where outdated forecasts can lead to misguided decisions.
Regular forecast updates are crucial for maintaining a clear and accurate picture of your business’s financial health, especially when the budget for a business is low. By consistently updating them as new information comes in, business owners are more likely to make choices that align with their actual financial situation and future prospects. This can be particularly crucial when considering major decisions like expanding a product line, hiring new staff, or investing in new equipment.
By comparing actual results to frequently updated projections, business owners can quickly identify areas where they’re exceeding expectations or falling short, allowing them to adjust their strategies so they can seize new opportunities or mitigate risks before they become serious problems.
Key Elements to Update in Your Forecast
When updating your financial forecasts, there are several key elements you should focus on to ensure that they paint a comprehensive and accurate picture of your business’s financial situation
First, review and adjust your revenue projections. This involves analyzing recent sales trends, considering any changes in your market or customer base, and factoring in any new products or services you plan to introduce. Be realistic in your projections, considering both optimistic and pessimistic scenarios.
Next, update your expense predictions. This includes both fixed costs like rent and salaries, and variable costs like raw materials or shipping. Pay attention to any changes in pricing from suppliers or shifts in your operational needs that might impact your expenses.
Cash flow estimates are another critical piece to update regularly. This involves projecting when you expect to receive payments and when you’ll need to make them. Accurate cash flow forecasts can help you avoid liquidity issues and make informed decisions about timing for major purchases or investments.
If you have specific metrics or Key Performance Indicators (KPIs) you’re tracking in your business, don’t forget to update those as well. KPIs might include metrics like customer acquisition cost, average revenue per customer, or inventory turnover.
Best Practices for Updating Forecasts
One of the most important things you can do to make forecast updates a habit is to establish a regular review and adjustment schedule. Whether it’s monthly or quarterly, consistency is key. Regular reviews allow you to spot trends and make incremental adjustments, rather than large, potentially disruptive changes.
If that sounds intimidating, remember that the goal is not to make a perfect prediction — that’s impossible. The goal is just to create a useful process for your decision-making.
To make the process of updating forecasts more efficient and effective, consider automating the ways you collect data whenever possible. Use financial software that integrates with your accounting systems, point-of-sale systems, and other data sources. This not only saves time but also reduces the risk of manual errors in your forecasts.
Utilize scenario planning in your updates, as well. Create multiple forecast scenarios — optimistic, pessimistic, and most likely — to better prepare for various potential outcomes. This approach can help you develop more robust strategies and contingency plans.
Overcoming Challenges in Forecast Updates
Updating forecasts is crucial, but it can feel challenging for small business owners who don’t consider themselves financial experts or numbers peopleÂ
One common challenge owners deal with is inconsistencies in their data. It’s not uncommon for business owners used to handling their finances manually to make some mistakes as they compile their monthly sales and expense reports.Â
Even if they’re small mistakes, they will affect their financial forecasts, because the owner’s actual financial picture will be off from the figures they use as their actuals to create a forecast off of. To address this, business owners need to establish clear data standards and processes for reconciling discrepancies.
Time constraints often pose another significant challenge, especially for small business owners juggling multiple responsibilities. To manage this, they should consider automating parts of the forecasting process to software providers. They should also prioritize the most critical elements of their forecast for frequent updates.
We’ve already mentioned that no forecast is 100% accurate. But it’s important for business owners to balance accuracy with timeliness. While forecasts should be as accurate as possible, spending too much time perfecting them can take time away from actually running the business. Aim for a level of accuracy that’s good enough to inform your decisions.
Leveraging Technology for Effective Updates
Software tools are a powerful ally for small business owners to maintain up-to-date financial forecasts. By leveraging the right tools, they can streamline the updating process and improve the accuracy of their projections.
Cloud-based forecasting tools allow for real-time updates and collaboration, making it easier for team members to contribute to and access the latest forecast data. Some forecasting tools now incorporate AI in their software to analyze historical data and market trends in order to generate more useful predictions. They can also identify patterns and anomalies that might be missed in manual analysis.
Look for tools that integrate with other business systems such as accounting software, as well. This not only saves time but ensures that forecasts are based on the most current data available.
