The Value and Need for a Forecasting Process in Your Business

Why do I need a forecast?

You need a forecast for your business because you cannot fully manage your business without one. Sure, you can manage your day-to-day stuff, for the most part, but it isn’t going to give you the long-term visibility needed to properly manage or lead your business for future success. Your business should be working from and regularly updating forecasts (at least quarterly) because:

1. Forecasting is more than just predicting the future.

Forecasts help you identify key sensitivities (risks) to your business, which tell you where your attention must be the most focused and possibly where the most resources must be invested.

2. Forecasts help you identify problems before they become crises.

When you have time to plan, you can avoid the crisis, or, if it happens anyway, you can have developed contingency plans when they occur. There are studies that show that the human IQ is 10% worse when we are in crisis. We literally become worse decision-makers in a crisis. That’s why a good forecast includes a worst-case scenario. It’s not enough to say how bad things might get – you need to be prepared to address that scenario when and if it takes place.

3. Forecasts create an environment in which accountability can fully function.

Forecasts are effectively commitments by individuals, teams and organizations to achieve certain goals. When forecasts are properly used over time, actual performance is compared to such forecasts. When forecasts fall short, that is a learning opportunity to either improve performance or the forecast. You don’t need to weaponize accountability for it to be useful, but few organizations achieve their full potential without accountability being a cornerstone of the organization’s value and culture.

4. If you need financing, you’ll need a forecast.

In the current environment, everyone is going to ask you for a forecast before seriously considering funding your business. The days of big checks being written to fund ideas over businesses are over (for now). They may come back, but it’s going to be a couple of years at least.

5. Forecasts require you to think about your business.

We all know the expression, “working on your business instead of in it.” I know firsthand how hard that is. But it must be done and the framework of a forecast is very useful to force us to think in the level of detail required to put together a usable plan.

Here are the excuses you probably tell yourself so that you don’t feel obligated to forecast for your business:

You don’t know how. OK, so you’re not an Excel genius and maybe you don’t even like numbers that much. However, if you’re successful, you’ve made your peace with the fact that being in business means being a numbers person. If you’re not as successful as you would like, chances are the numbers would tell you why. But someone in your circle knows how. Your CFO or controller, your accounting firm, a consultant, maybe even a board member or investor.

It’s silly to forecast because you can’t predict the future. Once you are in the practice of forecasting for a couple of years, you’d be surprised at how good a fortune teller you are. You’ll almost never get the forecasts bang on, but you will improve your precision over time.

I’m not looking for money, so I don’t need one. You may not be looking for money now, but you might in the future. Believe me when I tell you that you don’t want to have to start a forecast from scratch as you are looking for capital. And, potential acquirers will want to see your forecasts. Having a credible forecast on hand can shave weeks off an acquirer’s due diligence timeline.

While some may hesitate to start forecasting due to lack of expertise or belief that they can’t predict the future, the benefits of forecasting far outweigh these concerns. By investing time and effort into creating and regularly updating forecasts, businesses can achieve the clarity required to make informed decisions, avoid crises, and achieve their full potential.