Forecasting can often seem like a waste of time. After all, there’s a lot of assumptions made and when they go wrong, they go really wrong. Unless your forecast is accurate, it won’t be helpful at all. That’s why we’re presenting the 4 key ways to make your forecasting more accurate.
Start by creating two forecasts
You’re either an optimist or pessimist, but it can be tempting to sway on the side of one or the other when creating your forecast. However, to make your forecast as realistic as possible, you should find a balance between the two. That’s why we suggest creating two forecasts – one conservative and one aggressive. This will also help you maintain flexibility in your strategy planning as well as create more realistic – and therefore, accurate – expectations.
Next, focus on your expenses before the revenues
Take into account the expenses you know, rather than the revenues that are harder to estimate accurately. Building your forecast by first focusing on your fixed expenses that are almost certain to occur will give you a good grounding with which to build your forecast.
After that, consider the costs that are likely to fluctuate and mirror revenue. For example, if revenue grows by 10%, you can expect the cost of your sales to grow by 10% too.
Finally, take into account the expenses you have the most control over. With two forecasts, you can reflect which costs can be adapted to different scenarios, setting more accurate expectations for your forecast.
Then, compare your estimations
If you want your forecast to be accurate, then the estimations you make against your sales process, expenses and revenue predictions need to be as plausible as possible. To do this, compare your projections against the results of comparable companies. Look for the key financial ratios such as operating profit margin, headcount per client and direct costs to total revenue during a quarter, for example.
If your projections seem unrealistic compared to the ratios you are seeing in similar companies, you have a good indication that your forecast isn’t as accurate as it needs to be.
Most importantly, constantly reassess your forecast
If there is one thing we have learnt it is that forecasts should not be created then brushed aside for the next 12 months. Go back, assess and adjust your forecast as you would your budget. The fact is there are any number of external factors that could affect your forecast at any point. By revisiting your forecast and keeping it up to date, your forecast is not only more accurate but it will help you make more informed strategic decisions as you move forward.