Most business owners are too busy running a business. With so many nuts and bolts that make up a business, it’s no wonder how owners can find themselves overwhelmed. Yet, what happens when the market and economy drastically shift? Can your business survive or even thrive during these disruptions?
Don’t leave it up to chance. Today, we’re discussing the six steps of intentional and purposeful forecasting and how it can help you make better business decisions, even when times are tough.
What is Forecasting?
“Forecasting is actually an imperfect process of thinking through what it will take to achieve what you want. And then assessing whether it is realistic to try. It is imperfect because your business is constantly changing.”
Can you tell the future with forecasting? No. Businesses and economies are constantly changing, so it’s unrealistic to use forecasting to predict the future.
However, forecasting is an imperfect process that helps you adapt to ever-changing situations by giving you options and adjusting future actions.
Step 1: What’s Your Impact?
Intentional and purposeful forecasting starts with your impact. This will be the core of everything you do. Take some time to think about what impact you want to improve or what new impact you want to create in the future.
“You want to start with your impact first, because you will prioritize accordingly, because it grounds you to go back to why you started this business in the first place.”
Once you gain clarity on the impact and the corresponding metrics you want to achieve, here are some questions to help you move forward:
- What kind of investments are needed to achieve the impact metrics?
- How does your metric impact pricing?
- Do you have the capacity — resources, cash, staff capabilities, and number of staff, to produce the impact metrics?
- Is your business model aligned with your impact metrics?
Step 2: Data Gathering
Once you’ve identified your impact, move on to data gathering. In general, there are two main categories of data. These are financial and operational data.
Your financial data will show you your current gross margin, operating fixed costs, net profit, and working capital position. Financial is not enough, you also need to know your operational data which includes customer acquisition costs, total number of leads, customer conversion rate, customer lifetime value, average revenue per customer production capacity, inventory turnover, and accounts receivable turnover.
Step 3: Data Analysis
Data is useless if you don’t analyze it. Start understanding them by using the following questions:
- What happened?
- Why did it happen?
- What will happen in the next 12 to 18 months?
- How can you make it happen without compromising your value?
Step 4: Make Assumptions
Now, you can start forecasting with more specifics. This is similar to the previous step’s question of “what will happen in the next 12 to 18 months” but more detailed and specific. This is the time to now look at both historical rates based on your data as well as assumptions about the future.
Assumptions can be as simple as increasing the wages of your employees by a certain percentage or achieving climate neutrality. These assumptions will lead to important business decisions. For example, increasing wages may mean adjusting prices or reducing expenses; on the other hand, achieving climate neutrality may mean carbon offsetting, you will then need to further assume how much you need to offset to achieve your goal.
Step 5: Financial Forecasting
Remember, your finances will determine the health of your business. Run your current data into financial forecasting tools.
Don’t know where to start? You can check out a recent interview we had with Jirav.
Step 6: Update the Forecasting
Most people will stop at step 5 and forget all about step 6 which is regularly updating the forecast. “Remember, a forecast is a living document that improve over time and when used correctly, allows you to recognize early on if your predicted figures are off.”
It’s not enough to have data, you need to have consistent data. It’s only when you update your figures and forecasting that you’ll understand how and when to pivot.
If you want to create purposeful forecasting to create a lasting impact in the world, a CFO can help you figure out your next best move. Understand the six steps of forecasting price and maximizing your profits and impact with the help of a finance team. Schedule a discovery call with Profit Reimagined™ to help you cover your foundations and deepen your understanding of these concepts.