How can we help strengthen your business?

How can we help strengthen your business?

4 Benefits of Business Forecasting: How Does Forecasting Help You Make Better Decisions?

Future projections of cash flows (business forecasting) are just as important as the past financial performance of a company. Often, the historic patterns of cash collected from debtors and paid to creditors feed into the forecasted ‘cash from operating activities’, although this is not the only aspect to consider in forecasting.

Share this insight...

Insight by:

Future projections of cash flows are just as important as the past financial performance of a company. Often, the historic patterns of cash collected from debtors and paid to creditors feed into the forecasted ‘cash from operating activities’, although this is not the only aspect to consider in forecasting. None of us have a crystal ball to predict this future path exactly. But by looking at different possible scenarios, you can run projections to see what the potential outcomes and impacts may be.

There are two primary categories of forecasting: quantitative and qualitative. The former is based on statistical data and numbers, while the latter is based on insights and opinions.

Business forecasting: the Quantitative Approach

  • Naïve approach – Estimates are based on past performance and the assumption is that you will continue to perform as you have in the past, and does not account for trends, patterns, or other influences. It assumes that the same volumes of products or services will be sold.
  • Historical growth rate – This technique is used to understand a business’s growth rate over time and assuming that the same growth patterns will prevail in the future.
  • Seasonal forecasting – A season can be a specific period of a company such as a quarter or a month. A business would look at its performance over each particular season and assume in its forecasting that its performance will be the same for those individual seasons.

Business forecasting: the Qualitative Approach

  • Delphi method – This method involves questioning a panel of experts individually to collect their opinions. The experts’ responses are then analysed to form predictions on consumers’ behaviours and sales patterns.
  • Market research – Some ways to conduct market research include focus groups, consumer surveys or blind product testing, where a customer tries a product without having heard of it before. Based on the reaction of participants, companies can decide which products or services to continue producing and which might need revision in the production stage.
  • Executive opinion – Perspectives from different departments are considered in this forecasting technique. The experts from each department give their opinions on how they are expecting their respective departments to perform.

The benefits of business forecasting: why should you do it?

Financial forecasting is important because it allows finance departments to establish business goals that are both realistic and feasible. Producing regular management information is one way to help improve your business decision-making. But looking at historical numbers can only tell you so much.
  • Recruiting/ hiring – To determine whether a company needs additional human resources, a needs analysis would have been carried out where the strategic goals are formulated as well as the resources required to achieve them. It also needs to be determined whether the company can afford this addition, and financial forecasts would give a picture of the predicted cash flows and revenue, in essence informing whether the decision to hire is financially sound.
  • Operational and capital budgeting – Operational expenses are the day-to-day costs of running the business, while the capital costs are incurred from purchasing the assets that the company needs to generate their revenue. Forecasting revenue is followed by establishing whether the company’s current assets have the capacity to enable them to reach the envisaged volumes of production. The company determines what would be needed for projects by forecasting the possible expenses to be incurred and whether they need to make any asset acquisitions.
  • Predicting revenue – As mentioned earlier, forecasting can either be based on quantitative or qualitative factors. When predicting revenue, it is important to consider both. The company would consider the past revenue patterns while taking into cognisance possible factors that may influence consumers’ behaviours in the future. Having a picture of what the forecasted revenue would enable the company to plan ahead if they can afford all the other business decisions.
  • Strategic planning – Strategic planning provides a sense of direction and outlines measurable goals. The plan could be to increase revenue or brand reputation, etc. Forecasts can inform whether there is a need for any strategic changes to be made, which would call for strategic planning to be done. Examples of strategic changes that would be planned for would be discontinuing a product, product diversification, retrenchment, no name a few. These are decisions that can be informed by how good or how bad the financial forecasts portray the company in the months or years to come.

Use business forecasting to make better business decisions.

By making use of your cashflow forecasts, revenue projections and what-if scenario planning, you give yourself the insights needed to update your strategy and your business plan. Forecasts can also be made for business plans submitted to external parties such as potential investors when seeking funding. 

Kettle Consulting specialises in such a service in the form of drafting business plans and undertaking the capital raise. We also have a business health check tool, which informs managers of the financial performance and position of the company. Furthermore, the tool provides an action plan report on the areas that the business needs to improve or focus on. You may contact us for more information. Via email: info@kettleconsulting.co.za or via telephone: 011 025 1446

Insight by:

Puleng Malakoane

Management Consultant

Kettle Consulting (PTY) Ltd

Do you have comments or feedback about this article? We would love to hear it! Please send your comments/feedback via the form below.

Fill out the form below to get in touch with our Business Advisers. We can help with your business decision-making.