Business forecasts give leaders insight into the company’s sales, earnings, expenses, cash flow, performance, and more over a pre-defined period of time, such as quarterly or annual.
Your forecasts can help you understand:
- Best-case scenarios
- Worst-case scenarios
Insights from forecasting make it clear what’s causing revenue to rise or fall and allow business leaders to make strategic changes to correct course.
Accurate forecasting helps businesses plan for the future and maximize profits, but there are always variables called “assumptions,” which need to be factored into all types of forecasts that we’ll discuss.
5 Assumptions That Must Be Built Into Every Forecast
Accurate forecasts require you to keep a pulse on what’s happening in the market, seasonality, and so much more. All of this aggregated data is evolving every day, and while no forecast will likely be 100 percent accurate, assumptions should be considered.
Five main assumptions that are common across industries are:
1. Changes to Your Products and Services
Product and service offerings change over time, and you need to go into every forecast asking yourself a few questions:
- What are we offering product- and service-wise?
- Are there unprofitable products or services that we need to get rid of or adjust pricing for to be profitable?
You might sell widgets that have 20% higher material and production costs than last year, but depending on what you’re offering, customer appetite may sit below a certain price threshold. Consider all of these factors in the types of forecasts you create to improve accuracy.
2. Market Conditions
Markets go up and down, and if the economy is growing or shrinking, it will likely impact your sales. For example, forecasts suggest that as interest rates fall, consumer spending will rise. Forecasts must take into account:
- How the outlook on the economy will impact your market.
- Competitiveness in your industry and if new competitors are entering your market.
- Labor and material shortages and pricing trends.
Your market may perform well when the economy struggles, and all of these variables must be considered when creating your forecasts.
3. Political Tax Changes
Presidential elections change business. Every nominee has their own tax policies, which will shape the overall economy during their term. One issue that will be a major talking point going into 2025 is the tax provisions that are set to expire in 2026.
For example, the Qualified Business Income deduction (also called the QBI deduction, pass-through deduction, or section 199A deduction) was created by the 2017 Tax Cuts and Jobs Act (TCJA) and is in effect for tax years 2018 through 2025.
If the deduction were to be eliminated, it has the potential to increase taxes by 20% for business owners. On the other hand, given the results of the election, it’s possible that an even more favorable tax policy will be enacted. You need to stay on top of these changes and consider how they’ll affect your bottom line in the forecasts that you create.
4. Industry Changes
We live in a world of change. Laws, taxes, competitors, and even the technology we use all change. AI is a prime example of a change impacting most industries. In this respect, you also need to consider changes to:
- Your industry
- Consolidation
- Competition
- Pricing
Even small changes, such as a 2% increase in the cost of materials, must be accounted for when making forecasts.
5. Seasonality
Cash flow problems are the number 1 reason 82% of businesses fail, and if you’re not accounting for seasonality in your forecast, your cash flow will be misinterpreted. After all, one of seasonality’s biggest impacts on business is cash flow.
If you’re entering a slow season, based on historical data, your cash flow will be tighter, and you’ll need to make adjustments to account for the predicted drop in sales and cash.
Seasonal trends may also show an uptick in sales, allowing you to reallocate money to pay off debts or hire new employees. It’s important you’re aware of these seasonal trends and consider them accordingly.
4 Types of Forecasts to Help Your Business Have a Successful Year Ahead
Many types of forecasts exist, and while they all have a place in helping businesses understand the future, four types that we recommend for helping your business thrive in 2025 are:
1. Realistic Forecast
You create a realistic budget – one that will fit into the most likely scenario for the year ahead – so realistic forecasts should also be at the top of your list.
Realistic forecasts use your business’s historical data to create a baseline of what you think will happen in the period ahead.
When planning out your year, a realistic forecast of sales is what you’ll use, but you need to add in your expenditures, such as:
- Fixed costs, which include rent and loan payments.
- Variable costs, such as materials and supplies to make your products.
Realistic forecasts require reliable data that key stakeholders in the company can provide, such as your sales team.
2. Ideal Forecast
Stretch forecasts are fun to create. You’ll challenge yourself and your team to reach the targets you set, and often your team will:
- Hit higher sales targets
- Exceed expectations
What would happen if you pushed your targets 20% higher and everyone worked hard to reach this goal? Sales may rise, deadlines may be hit or missed, and cash flow may be tight due to higher production until invoices are paid.
You need to plan for your ideal forecast if you want to make it a reality.
Consider:
- The growth your current team can hit and whether you’ll need to hire new employees to hit the forecast.
- Market conditions that may be ideal to help you reach your goals or changes that must be made due to unfavorable conditions.
Ideal forecasts can materialize quickly, and when they do, you need to monitor changes and assign resources to meet deadlines and keep customers happy.
3. Bad Case Scenario
Bad case scenario forecasts are more or less a “worst-case” scenario. Your business can do everything right, but something happens – say politically – and your sales dip. For example, during the midterm elections:
- S&P 500 averages rise 11.2% during non-midterm periods, but
- S&P 500 averages drop 1.1% during a midterm
Sanctions or economic uncertainty can also have an impact on your business’s financials. A conservative budget considers:
- What if the economy goes into a recession?
- What if sales slump?
- What if you need to lay off some of your workforce?
For example, if a recession hits, you may need to lay off workers or change your pricing strategy. A bad case forecast is a valuable tool for your company because it allows you to plan for strategic changes in your operation.
I have found it’s better to plan ahead and think through those difficult decisions with a clear mind, rather than waiting until the heat of the moment, when stress levels are high.
A forecast will help you better understand what your financials will look like if the worst happens. If your sales slump, what integral changes must you make to keep your operations afloat? Should you line up additional financing so you have it if needed?
If you prepare for the worst, you can create a blueprint of what needs to transpire if these “what-ifs” do materialize.
You’ll want to remember that a bad case forecast can be adjusted as necessary. If you review your forecast, you’ll have the option to update it if sales are up in Q1 or if a recession hits.
Business leaders can use a bad case forecast to provide answers to stakeholders if any of the what-if scenarios do transpire. Also, I have found that banks value knowing you have a plan in case the year doesn’t go well.
4. Target Forecast
A target forecast is your dream scenario; where do you want your business to be in 3 – 5 years? Target forecasts push your business to new levels because they force you to do better year after year.
It’s like planning a trip. You identify your destination first, then determine how you’re going to get there.
When creating a target forecast, you’ll want to:
- Break down your forecast year by year
- Outline how you’ll achieve each year’s forecasts
- Create a step-by-step playbook for each year
- Monitor your progress and make adjustments as necessary
Commitment to Reach Your Target Forecast
Forecasts help you better understand the future ahead and what you need to do to reach your goals. Your forecasts shouldn’t intimidate or scare you; they should force you to take action and make strategic changes to your operations.
Do you want to reach your target forecast? If so, the time to make changes is now.
Contact us to learn how we can help you reach your target forecast.