“IfI only had a crystal ball to tell me what to do next in my business!” Those words have been uttered by more than one small business owner while attempting to predict future market performance.
There is a way to use the data you have to more accurately predict how your business will perform financially, but you do need to develop a bit of an instinct when it comes to your business. That’s where solid bookkeeping and small business accounting can really help guide you to better decision making. The answer lies in marrying instinct and data into a useful tool that can help a small business grow and see profits.
Sales forecasting in its most basic form amounts to using key business data to arrive at an ‘educated guess’ about how your business will perform in a future period. Small and large business executives alike all make educated forecasts in order to plan and make decisions. They base their predictions on industry trends, manufacturing factors, consumer demand and instinct; all areas that you can use for your own sales projections.
Beyond budgeting purposes, sales forecasting can be used throughout your business as a method of determining employment levels, promotional mix (marketing), and even production capacity. Forecasting can also be done on two levels, macro forecasting, including all markets in total and helps to assess demand, trends and what will happen in the future; and micro forecasting which focuses on cost per unit(s) and determining a particular product’s share of a market within a specific industry. These may seem like scary economic terms, but let’s think of them as ‘big picture’ and ‘small picture’ small business accounting.
Regardless of the product or service your small business sells, you can begin with an initial forecast of month by month sales for the next 12 months. With that data in hand you can then work up to a year by year forecast for the following two to five years. Initially, three years is a great starting point for most business plans.
Ask yourself a few basic questions about the company’s product(s) or service(s).
- What is the time horizon for the forecast? Do you need to forecast sales for 1st quarter or for the next several years?
- What is the availability of the data? In some markets information is more readily available than in others. If you have existing products, you’re more likely to estimate data than if you’re starting from the beginning.
- Where is the product in its life cycle? Products at the beginning of their life cycle will have less data and be more unstable than those in a mature life stage.
From here you can begin to gather information and start to generate a forecast. If you’re feeling overwhelmed or lost in how to manage this process, don’t feel you need to do it alone! Talk with a PASBA accountant or click on the Find an Accountant link at the top of this page.
PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.
Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.
Copyright Information 2011 Professional Association of Small Business Accountants