Business forecasting – a guide for start-ups

Periods of high inflation can pose a challenge for start-up businesses.

An increase in the price of input costs such as materials, energy, and the transportation services you need for your business to operate may impact profitability.

At the same time, customers often rein in spending so you may face fewer sales and lower revenues.

Together, increasing prices and falling revenue can throw business plans into disarray.

Business forecasting is a way of understanding how these types of challenges may affect your start-up.

Forecasting how trends such as customer spending could impact your business forecast can help you identify possible risks and opportunities.

You can then take action, such as reducing costs, to avoid unexpected cash flow problems.

Read our guide on ten ways to strengthen cash flow.

What is a business forecast?

Business forecasting uses historical and current data to predict future business trends and developments.

A business forecast can help you map out future business activities, such as allocating resources or deciding where to focus your marketing.

Companies generally use two methods for business forecasting:

• Qualitative forecasting – relies on the opinions and insights of experts and customers. An example is industry news and trends from trade bodies or a customer survey on likely spending habits that you can use to predict any potential impact on your start-up.
• Quantitative forecasting – uses historical data from your company or industry as a basis for future predictions. An example is looking at product sales over 12 months to learn how seasonality affects the type of products customers are likely to buy.

Several types of forecasts fall under the umbrella of business forecasting.

These include cash flow, sales, and growth forecasts.

You can gain a better understanding of your business using multiple types of forecast.

Why do you need a business forecast?

Business forecasting is helpful for any size business, not just to survive but to thrive.

By highlighting potential strengths and weaknesses in your business, you can prepare and plan based on data and insights rather than using guesswork.

A forecast helps you predict your business’s sales, costs, and profits, making it easier to set budgets and manage costs, for example.

You can use a spreadsheet to model ‘what if?’ scenarios, entering different values such as inventory costs, the number of customers, and average basket value to model revenue differences based on assumptions such as number of customers or how much each customer will spend.

Example forecasting scenarios include:

• cost modelling – creating forecasts based on how costs such as energy bills would affect your business if they increased by different amounts, such as 25%, 50%, and 100%
• revenue modelling – creating forecasts based on the number of sales you might make, looking at low, medium, and high sales levels. You can use this to explore how linked costs, such as shipping, increase as you make more sales
• breakeven – business forecasting can be used to understand your breakeven point, where your revenue balances your costs. By forecasting your future costs, you can determine how many sales you need to make to break even.

Cash flow forecast

A cash flow forecast estimates the cash going in and out of your business at a given time.

As well as understanding predicted cash in and out of your start-up, you can use a cash flow forecast in a variety of ways:

• cash shortages – identify where your business might be low on cash to be able to pay costs, such as wages
• surplus cash – a forecast of surplus cash may suggest that more could be invested into the business for growth
• better business decisions – calculate when your start-up might generate enough surplus cash to hire more staff, for example
• investors – potential investors may need to see a cash flow forecast before releasing funding
• stakeholders – cash flow forecasts can inform stakeholders and demonstrate that you are diligent in your business owner duties.

To create a cash flow forecast, you need to list the cash flow in and out of your business.

Examples of cash coming into your business include:

• sales
• investments
• loans

Examples of cash going out of your business includes:

• staff wages
• rent
• loan repayments

For more information, read our article on how to create a cash flow forecast.

Profit and loss budgeting

Profit and loss budgeting summarises a business’s predicted income and outgoings over a specific period.

Typically, businesses will budget on a monthly, quarterly, or annual basis.

Profit and loss budgeting will allow you to see if your business is predicted to be profitable or loss-making at any stage in the future.

Tracking your business is important for its future development.

By comparing your predicted profit and loss budget against your business’s actual performance, you can see whether your business is below, meeting, or exceeding expectations.

Sales forecasting

A sales forecast predicts the number of sales your business is expected to make in a given period.

A sales forecast will help you set business goals.

It can identify the number of sales your business needs to make to realise a profit.

Sales goals are likely more realistic if a sales forecast informs them.

Aspects to consider when calculating sales forecasts:

• working out all the costs involved, such as materials, production, fulfilment, and overheads, such as wages
• factoring in costs such as marketing
• dividing these costs by the number of products or clients you can service, giving you an average cost per product or service
• using this to understand how many products you need to sell to cover costs and how many more to make a profit
• exploring different impacts, such as how increasing pricing means you’d need to sell fewer products, but you’ll need to make assumptions about how higher prices might deter potential customers.

Read our sales forecast guide for a more detailed rundown on sales forecasting and how to create one.

Growth forecasting

Growth forecasting is a prediction of your business’s future revenue over time.

By knowing this, you can plan ahead.

If revenue is predicted to fall, you could focus on ways to increase sales or decrease costs.

If your revenue is estimated to grow, you could consider reinvesting money into the business.

To forecast revenue growth, you should start by listing your expenses and then your revenue by looking at your sales.

Put your past expenses and sales in a spreadsheet up to the present day.

Then extend your expenses and sales into future months whilst considering any factors that may affect them.