Business forecasting gives your company insight into what your potential is for the future. It gives you a clear insight into where you have been, and what you can expect to see moving forward. Using business forecasting, you can get an insight into the future based on your business growth, the state of your industry, and the market health as a whole.
Let’s take a look at business forecasting and what it can do for your business as you continue operations into the future.
What is Business Forecasting?
Business forecasting is a method that utilizes data to give you insights into the future growth of the business. There are a few different types of business forecasting, but they generally all function like this. These future numbers are created off of a large pool of internal and external data, and those data pools are put together and compared as a means of creating a potential number for growth. Typically, you will see the past profit or loss numbers of business quarters, industry growth rates, and overall market rates. There are more factors, but these are the three that are generally the focus of your forecasting, especially in industries that have heavy trends like the automotive industry.
Many businesses utilize business forecasting as a way to create goals and maintain progress in company growth. These theoretical numbers give their teams a benchmark to beat for each quarter, and that creates a drive to succeed beyond the potential for many.
Business forecasting can be the insight you need to make a final decision. If you are stuck in the middle of expanding your operations or breaking into a new market, business forecasting can give you better insight. If your bread and butter isn’t going to grown, but your new potential market is, forecasting will give you the heads up, so you can steer towards the new market. If they are both growing, your forecasting will tell you if it’s worth it to break into the new market or focus on what you have. Basically, business forecasting gives you an idea of what you can see in the future.
Types of Business Forecasting
There are a few different types of business forecasting that you want to keep in mind. They all have their uses, but they are all a little bit different. Before we get into these types of business forecasting practices, it’s important to note that forecasting won’t be an all-seeing eye into the future. It’s an imperfect practice that takes data points and turns them into predictions.
New industries come with new problems for startups and upstarts alike. The major issue is the lack of historical data available in the market. Since there isn’t a lot of history to look into, you have to find a different way to forecast for your business. This is where qualitative forecasting comes into play. This form of business forecasting relies heavily on industry and market experts, and their outlooks for industries in the future. Basically, you are trying to piece together as much information as you can to create a quality judgment about the future of your business.
Some industries don’t really change through the years. These industries tend to have a large amount of historical data that can help them with ideas for growth prediction for the upcoming market. When you have a lot of historical data to sift through, you are more likely to find patterns for your industry. These patterns can be used to shift your forecasting one way or the other. This is mainly used by long-standing industries, like automotive. The automotive industry sees growth through q1 and q2 with a high spike in q3. Q4 in the automotive industry is normally slower, and most companies take that time to prepare for the fiscal year. Why does it stay that way? Well, in q3, most people are getting their vehicles ready for winter, so there is an automatic boom.
The Average Forecasting Approach
The average approach to forecasting tends to lean on consistent growth year over year and quarter over quarter. This approach is usefully for those industries who are in a consistent and well-established market. Since the average growth and change year over year is consistent, it gives you a consistent set of numbers to apply to your future forecasting situation.
The Naïve Forecasting Approach
This forecasting approach takes a look at forecasts based on a specific time frame. Maybe you are looking for a specific way to forecast q3 earnings, and you want to compare them to the q2 earnings and last years q3 earnings. This is the most common form of business forecasting used, and it’s great for companies in volatile industries. It basically takes the idea that the future is a big question mark, so you have to figure out how you are going to navigate through it.