In an unpredictable business environment, forecasting is a crucial tool for businesses to navigate uncertainty and plan strategically.
In this article, we explore business forecasting, why it’s essential for managing risk and capitalising on opportunities, and how businesses use forecasts to make informed decisions. We also break down the steps to create a reliable business forecast and explore other ways to mitigate risk and maintain business stability.
What is a business forecast?
Business forecasting is the process of analysing historical data and using statistical models to calculate trends, foresee potential market condition changes and make informed predictions. This is invaluable for managing uncertainty and risk, particularly when preparing for seasonal and high-demand events like Black Friday and Christmas.
By leveraging accurate forecasts, businesses can ensure they have the proper inventory levels, allocate resources effectively and craft targeted marketing campaigns. This increases operational efficiency and profitability, turning potential uncertainties into growth opportunities.
Types of business forecasting
Business forecasting can be broadly categorised into qualitative and quantitative methods. Here are some examples:
Qualitative business forecasting methods
Businesses can use market research in the form of surveys, focus groups and interviews to gather insights directly from customers, suppliers or industry experts. This method helps forecast demand for new products and understand consumer preferences.
Scenario writing is another useful qualitative method. Here, businesses create different scenarios based on potential future events, such as economic downturns, new competitors or changes in consumer behaviour. They then analyse these scenarios and how they could affect operations.
The Delphi Method involves a panel of experts who provide opinions on future events. With the help of a facilitator, questionnaires and feedback sessions, the experts reach a consensus on likely outcomes. It’s useful for forecasting in areas with little historical data.
Commercial finance broker Dennis Horne from Equipmac Finance and Leasing says “When using qualitative methods to create a business forecast, it’s important to understand the quality of management, payment behaviours and the overall stability of key customers.”
Quantitative business forecasting methods
The moving average method uses historical data to identify patterns. By looking at various data points over a particular date range, you reach an ‘average’ data point, which you can then use to forecast future outcomes, such as market trends.
Regression analysis models help forecast the relationship between two or more variables. For example, a business might use regression analysis to predict sales based on variables like advertising spend, seasonality or other economic indicators. This method can also be used to understand the impact of pricing changes or promotional strategies.
Perhaps the simplest quantitative forecasting method, straight-line forecasting, assumes that future values will grow or decline at a constant rate based on historical data. It is often used for projecting sales, revenue or expenses over time when the growth rate is expected to be steady and predictable.
Whatever method you use, Dennis advises taking a risk management approach to forecasting. “This means taking into consideration the predictable or stable elements of business while accounting for potential changes in the economy or marketplace. It’s what Donald Rumsfeld called the known knowns and the known unknowns.”
Create a business forecast
Dennis has 42 years of business finance experience and says understanding your customers is critical to creating a reliable business forecast.
“Generally, 80% of your revenue comes from just 20% of your customers and it can be challenging to attract sustainable business from the other 80% of potential customers. So, with those 20%, it’s really important to assess the strength of those relationships, and whether they are going to continue to provide revenue for your business.”
Dennis adds that he always advises clients to use a forecasting method that considers customer behaviour.
Tips on creating a business forecast
- Focus on collecting precise, relevant data, particularly historical sales data from past seasonal events. Understanding previous demand patterns helps to predict future sales and reduces the risk of overstocking. Complement sales data with market trends and key economic indicators for a comprehensive forecast.
- Use forecasting templates and software to streamline the process. Templates provide a structured way to quickly input data, calculate trends and update forecasts.
- Use forecasts to refine procurement strategies. Order stock well in advance where this is viable, and negotiate supplier payment terms based on expected demand. Accurate forecasting ensures optimal inventory levels, helping businesses avoid last-minute costs and manage stock more effectively. “The marketplace determines the price, so your efficiency is what will give you a better profit,” adds Dennis.
- For events like Black Friday and Christmas, it’s essential to adjust procurement schedules to secure stock early, scale inventory based on forecasted demand and focus marketing efforts for high-demand products.
- Review and adjust forecasts as new data becomes available. Regularly comparing actual results with forecasts allows you to stay responsive to the market.
Financial tools for success
A forecast is important, but it’s just one piece of the puzzle. An accurate budget and thorough business plan are also key. “The business plan is your guide on how to run your business,” says Dennis. “If it’s in the business plan, go ahead and do it. If it’s not in the business plan, then it could be a risk.”
How Octet supports businesses
By combining accurate business forecasting with Octet’s tailored financial solutions, businesses can strategically manage cash flow, inventory and more.
A reliable business forecast gives insights into expected cash flow fluctuations. Octet’s Trade Finance solution enables businesses to align their cash flow with these forecasts by offering immediate access to working capital with flexible repayment terms. It even allows you the opportunity to negotiate early payment discounts with suppliers, whilst ensuring that your goods and services are received as early as possible for resale or other purposes.
Forecasting helps businesses anticipate when expenses will exceed income. When that happens, Debtor Finance (also known as Invoice Finance) is an effective tool to manage cash flow. It uses your accounts receivables as capital to fund inventory, pay wages, seize growth opportunities and more, even when cash flow slows.
“Octet is a specialist in this field,” says Dennis, highlighting Octet’s competitive pricing, experience and deep understanding of financial markets.
A partner you can rely on
Effective business forecasting and utilising the right financial tools are key to success.
By leveraging Octet’s tailored financial solutions, businesses can improve cash flow, secure inventory, and enhance supplier relationships, ensuring they are well-prepared for future opportunities and challenges.
Explore how Octet’s suite of working capital finance and payment solutions can support your business by getting in touch today.
Disclaimer: These comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
