Financial forecasting for growth: A complete guide for SMEs

This guide covers:

What is financial forecasting?
Why is financial forecasting important?
Financial forecasting vs. budgeting: What’s the difference?
What are the types of financial forecasting?
What are the advantages of financial forecasting for SMEs?
How to create a financial forecast
Why you should outsource your financial planning and analysis

As a business owner, you need to plan for what’s next, and that’s exactly what financial forecasting for growth is.

Short-term forecasting allows you to adjust your business plans based on what you see happening shortly.
Long-term forecasting can give you an idea of where your business will be further down the line.

At its core, financial forecasting is about peering into the future of your business. It´s about looking at past and present financial data to predict what might happen and how your business might look in certain scenarios (in terms of revenue, net profit, costs, and expenses).

While financial forecasts are a critical part of business planning, it is important to note that it´s not an exact science. Just like a crystal ball that helps predict the future, forecasts are the best guess of what lies ahead financially based on past and present facts. Accuracy is born out of the best knowledge at a given point in time.

Without financial forecasts, SMEs aren’t going to grow as sustainably, if at all. And as we all know, to not grow is essentially moving backwards due to inflation. Here’s how financial forecasting for growth serves as a proactive tool for growth and financial stability:

It helps you make informed decisions about growing your business, as you understand the impact on income, expenses, and profit.

It helps you maintain a healthy cash flow, as you can estimate how much revenue you will generate and how long it will take you to liquidate your profit.

It helps you avoid potential financial challenges. Forecasts serve as early warning systems, alerting you to safeguard your financial resources where needed (e.g. if you anticipate sales shortfalls or significant debt payments on the horizon).

It helps you with resource and talent management planning. For example, if your forecast indicates an upcoming surge in demand for your products or services, you may want to hire more staff. Whereas, if your projections show reduced activity, you may need to adjust your staffing levels and focus on cost-cutting measures.

It estimates how changes in the economy could impact your business, allowing you to prepare for potential challenges and capitalise on opportunities as they arise.

It prevents stagnation, as you can make strategic decisions quickly and confidently allocate resources or invest in innovation at the most opportune time.

Budgeting and financial forecasting kind of work in the same way, but the purpose of each is different.

Budget: This is a concrete financial plan, outlining what you aim to achieve over the financial year. Think of this as a roadmap, set at a particular point in time, of how to get from where you are now to where you want to be.

Financial forecast: This is your dynamic view of the future, outlining different potential scenarios and how they will impact your finances. Think of this as a reliable GPS that recalculates your route when you encounter unexpected traffic or road closures.

Do you see the difference?

While a budget is a form of forecast, its purpose is to set the initial target, providing a valuable baseline and clear financial goal for the year. Financial forecasting is what allows for adjustments and course corrections as reality unfolds.

Unlike a budget, a forecast also isn´t restricted by a time period. It may take you to the end of the fiscal year or forward for a rolling 12 months, or even 3-5 years ahead if needed.

While together, they form a financial strategy that keeps business performance on track, it’s crucial to remember that we don’t know what we don’t know. When circumstances change, and they often do, additional forecasting may be necessary to veer away from the original budget.

Quantitative Forecasting:
Quantitative forecasting provides you with concrete numbers and trends to inform your decisions. It’s like using a mathematical compass to navigate your financial future. Here, you rely heavily on historical data and mathematical models to predict outcomes.

When to use it? This approach is particularly valuable when you’re predicting numerical aspects of your business, such as sales projections, revenue forecasts, or inventory management.

Qualitative Forecasting:
Qualitative forecasting takes a more subjective approach, drawing insights from expert opinions and market research. Think of it as the art of understanding the less tangible aspects of your business landscape. This method is invaluable for gaining a holistic view of your business’s potential.

When to use it? This approach comes into play when historical data is scarce, or unreliable, or your instinct tells you that the past will not be a good predictor of the future.

Choosing the right forecasting method depends on your business’s specific needs and the nature of the data you have at your disposal. However, the key is not to limit yourself to one approach. Often, the most effective forecasting strategies incorporate elements of both quantitative and qualitative forecasting to provide a more comprehensive view of your business’s financial future.

Informed Decision-Making: It provides the insights you need to make informed decisions about investments, expenses, and resource allocation. When you see the potential outcomes of all your choices, you can easily select the most promising path forward.

Measuring Success: Your financial forecast sets out a clear path to measure success, by establishing performance benchmarks and key performance indicators (KPIs) that allow you to gauge how well you’re doing relative to your goals. This not only provides a sense of achievement but also highlights areas that may need improvement.

Effective Cash Flow Management: By predicting future cash flows, you can plan ahead, ensuring you have the necessary funds to cover expenses, seize opportunities, and weather any financial storms that may arise.

Identifying Pinch Points: By examining your financial projections, you can identify periods of tight cash flow, revenue shortfalls, or increased expenditures, and take proactive steps to address these challenges before they become critical issues.

Planning for Investments: Financial forecasting helps you plan for investments strategically. It allows you to allocate resources wisely, ensuring that your investments align with your long-term goals and financial capacity.

Being Proactive, Not Reactive: Completing forecasts at points throughout the financial year keeps your business focused and looking forward. It helps you remain vigilant to changes in your industry, the broader economy, or shifts in customer expectations, allowing you to stay ahead of the curve.

As you can see, you´re not just looking at numbers when you forecast; you´re building a solid foundation for the growth and prosperity of your SME.

Step 1: Set Clear Goals
To begin, you need to think about why you want a financial forecast and what specific data you’re looking for. Do you want to achieve increased revenue or better expense management? Do you want to mitigate business risks or estimate the impact of increasing interest rates? Or do you simply want to have clear reports of past performances? Whatever your reason, your financial forecast should align with your strategic business objectives. And once you have your why established, you can determine the metrics you want to focus on.

Step 2: Establish a Time Frame
When do you want to achieve the goals that you´ve set out? Is it a quarterly projection, an annual plan, or a multi-year outlook? Whatever timeframe you establish for your forecast, it´s important that it´s as realistic and accurate as possible. A good practice is to set a timeframe and work backwards, providing relevant benchmarks or milestones that need to be accomplished within the time allotted.

Tip! The duration you choose depends on your business’s unique circumstances and goals. For example, a newer business won´t have much historical data and growth patterns to analyse and pull from, so it´s harder to predict long-term. It´s also important to note that the longer the forecast, the lower the accuracy, as there is more time for external factors to influence the results.

Step 3: Choose Your Forecasting Method
Once you know the purpose of your forecast and its timeframe, you´ll need to select the most appropriate forecasting method for your SME. Will you rely on quantitative methods, qualitative approaches, or a blend of both? Your choice should align with your business type, the nature of your data, and your industry, as well as the expertise of your team and the software you´ll be using.

Tip! If you´re a newer business or don´t have much historical data to work with, using qualitative / assumption methods may be more appropriate. On the other hand, if you have a lot of data, quantitative methods like a time-series analysis would be a good fit.

Step 4: Gather Relevant Data
To build a reliable forecast, you´ll need to gather the necessary data. This involves reviewing and analysing your financial statements, including income statements, balance sheets, and cash flow statements, over a certain period of time. For example, if you´re creating a financial forecast for the next six months, you might need to look at the data from the last three six-month periods.

The key at this stage is to base your forecasts on both historical data and present circumstances, so take into account current economic factors and industry trends that will influence your predictions. This combination provides a solid foundation for your forecast.

Step 5: Create a Comprehensive Report
Once you have gathered the results of your analysis, you can create your financial forecast. This report will become your roadmap to financial success, as it should clearly outline your goals and forecasted numbers, helping you stay on track continuously and consistently.

At this stage, you can create multiple forecasts if you want by varying your assumptions to predict several potential outcomes. By doing this exercise, you can prepare for unexpected scenarios such as slow growth periods or higher-than-expected growth.

Step 6: Monitor Your Performance and Make Adjustments
A financial forecast is not a set-and-forget document but a dynamic tool requiring regular attention. This means that you should continuously monitor your performance against your plan and be ready to make adjustments as needed. For example, the business world is constantly changing, so if a major change happens in your business or the industry as a whole, your forecast should adapt accordingly.

Tip! If you find that your business isn´t performing as well as you´d like, don´t be afraid to change your forecast. Your forecast needs to be accurate to keep your business on the right track, so it should reflect the current reality.

Step 7: Make Allowances for the Unknown
Uncertainty is a constant companion in business, so a good financial forecast needs to account for the unknown. Here are some easy ways to factor in the unexpected:

Carry out Sensitivity Analysis – this is a valuable tool that helps you explore various scenarios and plan for contingencies. For example, how changes in variables like sales volume, pricing, or economic conditions might impact your financial future.

Review and re-forecast – if you carry out a forecast, refer back to it and measure it against your budget. In an ideal world, you might re-forecast your performance 2-3 times a year after the initial budget, but aim for what you can do. The point is taking a fresh look at things at a point in time to see how you´re doing versus what you originally expected and then mapping out a different set of numbers based on what you know now but didn´t at the time of the budget.

Outsource your financial planning and analysis – seeking external support with your financial forecasting not only saves you time and stress but also guarantees that your forecasts are consistently up-to-date and, therefore, as accurate as possible at any moment in time. This allows you to be proactive and adaptable and better equipped to navigate the inevitable changes that will occur.

Accurate financial forecasting is not just a financial exercise; it’s a strategic tool that offers insight into your business´s future. Being at the helm of an SME can be challenging, and we understand that financial forecasting may not be your primary focus. However, the discipline of keeping close tabs on your actual financial performance and your projections will allow you to plan for growth, not to mention it will stand you in good stead no matter what the future brings.

Completing a forecasting cycle can be time-consuming, a drain on resources, and potentially overwhelming, so don’t be afraid to seek support when needed. Mettryx is here to partner with you on this journey, offering expertise, experience, and fresh perspectives to help your SME succeed in a competitive and ever-evolving business landscape.

Achieve what you set out to
If you found the above insights valuable but still feel daunted by taking on this yourself, then please get in touch to see how we can help you.

When you choose Mettryx as your partner, you gain access to over forty years of combined experience in delivering financial plans for businesses like yours. We specialise in taking the stress out of the budgeting and forecasting process, providing you with accurate and insightful financial guidance.