Forecasting: Your best path to profits

Written by Briana Cavanaugh

February 3, 2022

We All Want to Make the Best Decisions

When you’re deciding on a business strategy, do you frequently hesitate between options?

Me, too! I always want to make a decision that will work best for my short- and long-term business goals. I’ve learned that to find my best path to profits, one of my strongest planning tools is a well-made set of projections, also known as forecasting.

Many small business owners don’t fully understand what projections are and why they are important. They allow you to estimate how much money your company is likely to make in the future so that you can see if a strategy will get your business closer to its revenue goal for the year or if you need to make adjustments. Making several projections based on different scenarios can also help you figure out which adjustments are the most important.

And one of the benefits of running a forecast is that you get to see how all of the parts of your business are interdependent. This can give you greater clarity about how things are already working well or could be improved.

In this blog post, I’ll discuss the basics of projections and explain how they can help you make the best decisions. I’ll also provide some examples to show how to create accurate projections.

If you are looking for ways to make your business more profitable, keep reading!

What Strategies Can Help Businesses Profit?

Previously, I wrote that addressing three key areas will increase your revenue: revisit your pricing strategy, reconsider your offerings, and revamp your marketing. If you haven’t read that article yet, you might want to go read it now and take notes about any strategy ideas that come to mind for your business.

Trying to implement two or three big projects at the same time can create confusion, task management problems, and resistance, whether you are working alone or with dozens of people. So if you want to revamp more than one of these three major areas of your business, consider what order would be best for your company.

Let’s look at just one area that’s top of mind for many business owners: marketing. What’s the best way to attract new clients? There is no one right answer for every situation!

If you enjoy attending a lot of events and meeting new people, maybe for you the best option is to join a professional association and network your heart out. I love doing this!

On the other hand, maybe you don’t have time for events, or it’s hard to make a connection because they typically don’t support your disability or neurodivergence. So you might be considering taking control of your Google Business profile, sending bulk mail to local addresses, or outsourcing to a digital marketing expert. Which of these options would be most profitable for you? Or if none of these sound right for your company, what does?

One shortcut is to try “satisficing” – that is, just find an answer that’s good enough. Where do your clients expect to see information about businesses like you? How can you increase your visibility in those spaces?

It’s important not to trick ourselves into making things hard. This is one of the places where mindset comes in. If I believe making money is hard, I might dismiss easy answers out of hand, when the reality is that maybe your business only needs a minimum of extra effort to be more visible and get the increased income you desire.

Comparing Your Budgeting Decisions to Similar Businesses

Before you start forecasting, another way to approach planning and spending questions is to ask, “What do businesses like mine typically spend on different types of advertising?”

Businesses are “like mine” when they’re about the same size and they generate value in the same field. For example, Bliss Your Money does profitability consulting as well as bookkeeping services, so I would be cautious about comparing us to a company that only does bookkeeping.

To find out about industry norms, I can talk to a reference librarian or business librarian at a university, either a local school or one I attended. Large private companies spend a lot of money to create surveys that answer questions like these, and while it costs money to get access to the survey results, university libraries often have paid for that access and can provide it to you for free.

New Strategies Cost Time and Money (And Time Is Also Money)

How much money are you trying to make and how fast are you trying to bring it in? Do you have ambitious goals with room for flexibility, or are you just trying to keep your business from permanent closure?

(You aren’t a bad entrepreneur if things are too hard to allow goal flexibility! These are unusually difficult and unpredictable times. Not everyone has this kind of clarity about their business – and with many business owners I’ve worked with, I’ve seen that getting to that kind of clarity has multiple rewards!)

Getting started on a new strategy can involve risk. So how much additional money will this strategy bring in, and when will the money arrive?

When I talk to entrepreneurs whose businesses are struggling, they usually choose lower-risk methods to increase their income, rather than shooting for the moon and maybe seeing little to no return. The strategies that have the potential for the highest returns are often the riskiest, unless you have a hidden advantage.

A new strategy can involve new or increased expenses, such as software and payroll costs. And it may take more than a little of your labor. A lot of business owners work themselves beyond their sustainable capacity – so to avoid exhaustion, remember to check your calendar and personal bank account, and translate your time into reasonable payroll-like costs even if you are only paying yourself in owner draws!

All of these risks and costs need to be considered when you’re trying to pick the best strategy. But there’s one more big consideration that has to get on the table before you start creating your forecasts: your risk tolerance.

How Your Situation Affects Your Risk Tolerance

To figure out where your business stands and what your risk tolerance is, look at the financial statements from the last several months, and compare your budgeted revenue and expenses to actual.

(The information you’re reviewing needs to be accurate. It’s important to get your books in order and up to date before running these reports and comparisons. A skilled, dependable bookkeeper can really help you by setting the stage for you to focus on the higher-level strategy stuff. Most bookkeeping work looks backward, while most of your strategic planning looks forward. The best strategic planning rests on a solid foundation of understanding the past.)

Depending on the scope of the changes you are considering for your company, there are times to look back months and times to look back years.

The first projection you want to run should be based on the assumption that you aren’t going to make any serious changes. Try looking ahead for just one year. That means you would want to look backward at least three years – or if you have clean business records that go back far enough, look backward at least two pre-pandemic years so that you can get a feel for the normal ebb and flow.

Next, you can create additional forecasts for your different marketing options to see if one of them is a clear winner.

A Shortcut to Evaluating Risk

If you are contemplating a risky marketing option, you might think you need to forecast two scenarios for it – one that seems realistically pessimistic and one that seems realistically optimistic. However, an even easier way to understand the value of a certain choice is to multiply it by the chances that it will have the desired result at the desired time. Let’s math a little bit:

Expected Revenue x Profit Margin x Likelihood Of Outcome = Expected Value

Let’s say that I’m running a store and I’m thinking about offering a new product. I want to buy 100 boxes of the product for $2 each and sell them for $10 by the end of the month. I’ll value my overhead at $1 per box. That’s $1000 in revenue and 70% in profit, but will I be able to sell all of the boxes that quickly? I think I have a 25% chance of selling them all.

$1000 Revenue x 70% Profit x 25% Likelihood = $175 Expected

Notice that the value I’ve calculated for this decision is lower than the $200 I would spend to buy the product. I haven’t broken even at the end of the month. However, if it doesn’t cost me extra money to store the product, and the product doesn’t spoil, I think there’s a 95% chance I can sell all of it within 6 months. What does it look like if I change the timeline?

$1000 Revenue x 70% Profit x 95% Likelihood = $665 Expected

Of course, in a real-life situation, I might be selling products that spoil or cost additional money for each month of storage, so my projection might be more complicated. In the end, the best decision will be heavily influenced by the current business situation. Can I afford to wait 6 months for that $665 profit to arrive? If I can, this might be a good direction to go!

Software to Help Create Financial Projections

The best way to create a full financial projection will start with your accounting software. It may have enough forecasting features to answer your questions.

Having your personal and business bookkeeping in order is vital for making realistic projections! An experienced bookkeeper/accountant can also set up custom reports that go a long way toward answering your questions.

If you’re using QuickBooks Online, look at the left sidebar and select Cash Flow -> Planner. You can play with numbers here without affecting the rest of your QuickBooks file. Additionally, try selecting Settings (the gear icon on the upper right) -> Tools -> Budgeting. Depending on what level of QBO you have, you may only be able to look ahead 90 days. If you’ve never done forecasting before, this is just a taste of the possibilities.

Since the QBO budgeting and forecasting features are limited, you might want to try financial forecasting software. There are a lot of options available, and many of them can automatically capture your QBO data and assist you in analyzing it.

A financial systems and profitability consultant can help you hook up your accounting system to your forecasting system. A lot of these types of applications have additional features to help you with other projects such as business planning, pitch deck building, and attracting lenders or outside investors. Before you choose, compare the price points and features to make sure you aren’t spending more than necessary to get the features you’ll actually use.

How to Create Financial Projections

Even if you don’t have fancy forecasting software, you can start thinking about the future just using a spreadsheet application or a pencil and calculator. Now maybe you’re thinking you would never create a forecast with just a pencil, and that’s fair! But let’s talk about how you’d pencil it out, because this is where we can really see how projections work.

So imagine I’m drawing a table by hand, with the names of the months in a row across the top. In the left-hand column, I’ll write the expected categories of expenses and income. Now for each column and row, I write in the expected dollar amounts. I total each column at the bottom to see what my estimated cash position will be at the end of the month.

For example, let’s say I’m a solopreneur and I’m thinking about doubling the amount of social media marketing that I do. I’ll do this by getting rid of FrumpyTool, which only costs $20/month, and start using ZippyTool, which works twice as fast but will cost $35/month. My projection needs to reflect that the $20/month cost is going away, and the $35/month cost is being added. I plan to spend the same amount of time each week working on social media posting, so the cost of labor with FrumpyTool and ZippyTool are the same, right?

Not quite! First I have to learn how to use ZippyTool. Let’s say at a rough guess that switching to ZippyTool will cost me an additional 15 hours of labor the first month, 7 hours the second month, 3 the third month, and no extra time the fourth month. These extra hours all need to be added as expenses to my forecast. For this example, I’ll cost out my time at $100/hour.

Here’s (below) is my table. It’s a lot of numbers! To make it easier, sometimes I hold up a piece of paper to cover the columns on the right. Then I can just start at the top of December and read down to the bottom.

Actual Projected
Dec Jan Feb Mar Apr May Jun
STARTING BALANCE  $  12,000  $  20,980  $   24,425  $   29,690  $    37,355  $     48,320  $    63,285
Unchanged income  $  10,000  $   10,000  $    10,000  $    10,000  $    10,000  $     10,000  $     10,000
Income from FrumpyTool   $   6,000  $     1,000
Income from ZippyTool  $     1,000  $     3,000  $     5,000  $     8,000  $     12,000  $     12,000
Total Income  $  16,000  $   12,000  $    13,000  $    15,000  $    18,000  $     22,000  $    22,000
Unchanged expenses  $ (7,000)  $  (7,000)  $   (7,000)  $   (7,000)  $   (7,000)  $    (7,000)  $    (7,000)
FrumpyTool subscription   $      (20)  $       (20)
ZippyTool subscription  $       (35)  $        (35)  $        (35)  $        (35)  $         (35)  $         (35)
Extra labor for ZippyTool   $   (1,500)  $      (700)  $      (300)  $           –  $            –  $            –
Total Expenses  $ (7,020)  $  (8,555)  $   (7,735)  $   (7,335)  $   (7,035)  $    (7,035)  $    (7,035)
MONTHLY TOTAL  $    8,980  $    3,445  $     5,265  $     7,665  $    10,965  $     14,965  $     14,965
CLOSING BALANCE  $ 20,980  $  24,425  $   29,690  $   37,355  $    48,320  $     63,285  $     78,250

 

First, there’s December’s starting balance, the amount of money that was in the business checking account on December 1st. The monthly income line shows me how the business performed for the month. At the bottom of the column, I added the starting balance to the monthly income to get the checking account’s closing balance. I want to look at each month’s closing balance and make sure it’s higher than the next month’s total expenses.

Since I’m making this table by hand instead of using forecasting software, I haven’t detailed what’s included in “Unchanged expenses,” but let’s assume that it includes my owner’s draw – I’m paying myself the same amount every month regardless of whether revenue goes up or down.

Can you identify some other assumptions I made in this forecast?

  • In January, I’ll have to pay for both tools while I transition from using one app to the other.
  • The extra labor for learning how to use ZippyTool isn’t subtracted from the other labor I’m already doing that directly generates revenue. That means either I’m planning to work overtime to learn ZT, or I’m cutting back on business activities that don’t directly generate revenue.
  • Maybe doubling the social media exposure won’t double my revenue right away, so I’m estimating that in the first three months of using ZippyTool, revenue will be lower than it was in December. However, my business has enough cash reserves to cover the projected dip in this revenue stream.

This forecast also assumes there are no seasonal changes in my business expenses and income. If you look at your financial reports over the past several years it can help you identify seasonality in your business. Knowing to plan for seasonality will help you a lot!

Here are some additional resources to help you understand forecasting. This topic can go pretty deep, so these articles are listed in order of increasing difficulty. You don’t have to read them all.

Setting priorities

When setting priorities, successful business strategies will be based on your own company’s strengths and weaknesses, not the competition. You’ve already demonstrated a lot of skill, creativity, and passion to get to your goals!

And if all of this money math sounds scary, let us help! Our experienced team is ready to support you through every step from cleaning up your books to creating a budget to forecasting and evaluating your strategy options. With Bliss by your side, you can create a profitable business model that is tailored specifically for your situation.

Contact Bliss today!

 

BOOKKEEPING DONE FOR YOU

7 Ways Your Bookkeeper Can Help You Get – and Stay – Profitable.

Your Bookkeeper CAN Help You Make—and Keep—More Money. It’s not as hard a you think. And we can even put the processes in place for you. Sign up to get more details!

You May Also Like…

0 Comments

Submit a Comment

Your email address will not be published.

LEARN THE SECRETS

To Get- and Stay- Profitable!

The easy step-by-step guide to understanding profitability!

Step by step profitability tools
Straight forward (and loving) advice from a leading expert in the industry!

Get your money working for you
Instead of you working for your money. Let's get you off the hamster wheel!

You have Successfully Subscribed!

77 Money Leaks And How to Fix Them Right Now

You have Successfully Subscribed!