For small business owners, a financial forecast is more than just a report—it’s a roadmap that guides you from where your business is today to where you want it to be tomorrow. Much like a well-planned journey, forecasting for your business provides the milestones and directions needed to navigate opportunities, overcome obstacles, and achieve growth.
Whether it’s planning for expansion, managing cash flow, or refining your budget, your financial forecast is a powerful tool to help you achieve your business goals, one step at a time. Read on to learn how small business owners can make the most of their financial forecast throughout the year.
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How to Use Your Financial Forecast to Guide Your Small Business Throughout the Year
1. Set Clear Goals and Benchmarks
At the beginning of the year, use your forecast to set clear financial goals. These might include specific sales targets, profitability goals, or expense reduction efforts. Break down annual goals into quarterly or monthly benchmarks to keep them manageable and actionable. By regularly tracking your performance against these benchmarks, you’ll gain insight into how your business is progressing and be able to celebrate small wins along the way.
Example: If your forecast includes a target of 15% profit margin per project, use that as a benchmark and check the profitability of each project monthly. This helps you identify if a project is at risk of going over budget, allowing you to adjust costs or timelines early.
2. Monitor Cash Flow to Stay Ahead of Challenges
A cash flow forecast tells you when cash inflows and outflows are likely to occur, helping you stay prepared for tight periods. Throughout the year, revisit your cash flow forecast each month to compare your actual cash position with your projections. This allows you to identify any cash shortfalls before they become a problem, giving you time to arrange financing, delay non-essential spending, or focus on collecting receivables.
Example: If your forecast shows a potential cash crunch in June due to seasonally slow sales, start planning early. You might negotiate payment terms with vendors, secure a short-term line of credit, or increase your marketing efforts to boost sales.
3. Use It to Adjust Your Budget in Real-Time
Your financial forecast serves as a starting point for your budget, but as the year progresses, actual results may differ from your expectations. Adjust your budget quarterly based on your financial performance, especially if revenue or expenses are significantly higher or lower than projected. This helps keep your spending in check and ensures that resources are directed to areas that are driving growth.
Example: If you projected $5,000 per month for marketing expenses but see higher-than-expected returns from digital ads, you might reallocate part of your budget from underperforming areas to further boost your digital efforts.
4. Reevaluate Staffing and Resource Needs
Your forecast can also help you make smarter staffing and resourcing decisions. If your forecasted growth targets are being met, you may feel more confident about bringing on additional staff, investing in new technology, or upgrading equipment. Alternatively, if your forecast shows lower-than-expected growth, you can delay hiring plans or shift employees to more critical roles.
Example: If your forecast predicts an increase in projects by Q3, you might plan to hire additional field workers in Q2 to ensure you’re ready to meet demand. Alternatively, if demand looks lower, you might cross-train current staff instead of hiring new team members.
5. Adapt to Market Changes with Scenario Planning
Financial forecasts can be flexible tools if you use scenario planning. By creating multiple versions of your forecast—such as best-case, worst-case, and most-likely scenarios—you can stay agile and ready for various market conditions. Throughout the year, evaluate which scenario is closest to reality, and adapt your strategy as needed.
Example: If a new development project gets delayed or material costs increase, switch to your worst-case scenario to adjust project timelines, reallocate resources, and plan for slower revenue periods.
6. Inform Strategic Decisions and Investments
Your financial forecast is invaluable when it comes to big decisions, such as expanding operations, launching a new product, or entering a new market. Revisit your forecast when these opportunities arise to assess your financial capacity. By analyzing projected cash flow, profits, and growth trends, you can decide whether the timing and resources are right for these strategic moves.
Example: If your forecast shows a strong cash flow in Q4, you might feel comfortable investing in a new product line or adding a location, knowing you’ll have sufficient funds to support it.
7. Measure Progress with Regular Performance Reviews
Each quarter, compare actual results to your forecasted figures. Identify areas where you’re outperforming expectations or falling short, and analyze the reasons behind the variances. These regular performance reviews will help you refine your forecast over time, making it a more accurate and valuable tool for planning.
Example: If actual expenses are consistently higher than forecasted due to unexpected shipping costs, adjust your forecast for the rest of the year to reflect these changes. You can also explore ways to reduce shipping costs to bring expenses back in line.
8. Prepare for Tax Season and Year-End Planning
As the end of the year approaches, your financial forecast can help you plan for taxes and close out the fiscal year smoothly. By reviewing your forecasted income and expenses, you can make tax-saving decisions, such as making business purchases, contributing to retirement plans, or deferring income. Your forecast also helps you identify any outstanding expenses, invoices, or budget adjustments you’ll need to address before year-end.
Example: If your forecast shows higher-than-expected profits, you might consider purchasing needed equipment or making charitable donations to reduce your taxable income.
9. Refine Your Forecast for the Next Year
At the end of the year, you will meet with your financial team, such as your advisor at Bernstein Financial Services, and review how accurate the predictions were and what assumptions held true. By identifying where variances occurred, you can adjust your future assumptions and make more reliable projections moving forward.
Example: If last year’s forecast underestimated seasonal fluctuations in project demand, adjust next year’s forecast to include higher activity in summer and fall. This refinement helps ensure your cash flow and staffing needs are accurately projected moving forward.
Create Your Own Report For Your Business Goals: Learn how to create a financial forecast for your small business step-by-step.
Incorporating forecasting into your business planning process is like navigating with a map: it won’t predict everything that lies ahead, but it will certainly give you a clearer sense of direction. By regularly reviewing and adjusting your forecast, you can stay on top of cash flow, adapt to changing circumstances, and take advantage of opportunities as they arise.
For personalized guidance, please schedule a consultation appointment with a Principal at Bernstein Financial Services to help you determine your optimal planning strategies.
The information provided in this blog post is for general informational purposes only and is not intended as legal advice. Every business and financial situation is unique, and the strategies discussed may not be applicable to your specific circumstances.