Connect with us

Hi, what are you looking for?

Online Business Success

Three Suggestions For Forecasting In A Startup

Board Member at Vikua

Once you start a company, it won’t be long until you have to create your first financial forecast. This is a key planning tool that will guide your management team in day-to-day decisions and give insight to investors on the outlook of the business. Forecasts include the main activities where your business receives and spends money and analyzes them over time. They usually cover no less than a year, extending for five or even 10 years, depending on the phase of the company and the business model.

It seems like a straightforward deliverable, but forecasts in a startup are often symbolic chores that end up as unread and/or unanswered emails. A part of the reason is very understandable: When a company is at the beginning of its journey, there are an infinite amount of questions for which they do not have answers.

However, in my experience, even with these questions looming over you, maybe even for years, there are a few tactics you can implement to obtain a logical, and above all, useful forecast for your business.

1. Forecasts are guidelines, not an exact science.

Advertisement. Scroll to continue reading.

This is not to say that the exact numbers of the forecast mean nothing. They are definitely the objective that is being defined and will ultimately signal if the company is on its way to financial success. However, not hitting the forecast goals right on the mark should not be considered an automatic failure. The degree of separation between reality and forecasts is a great initial way to evaluate the business and also the forecasting process itself. Results that differ significantly from a forecast can still be very promising, considering the phase of the business and the market environment.

Business owners should use forecasts as a guideline to identify key trends in the business when compared to actual results, even if the numbers don’t line up exactly. The information will always contain insight on which financial lines are increasing or decreasing and at what pace. In turn, this allows for identifying areas where more focus is needed, and weak spots in the business model can be detected before they snowball. 

While not an exact science, it’s important to be very aware that forecasts create expectations in owners, team members and investors. All of these groups will potentially understand when the company does not meet the forecast as long as the reasoning for it is sound and the management team comes up with solutions going forward. 

2. The assumptions are just as important as the numbers.

We’re used to seeing forecasts as finished products: eye-catching Excel sheets or beautiful slides that tell the story of the forecast almost like a movie. While the presentation of a forecast is a fundamental step, it’s important to realize the process is similar to a great dinner recipe. The ingredients are just as important as the presentation.

The ingredients are assumptions, either fixed or variable. They are the main answer to when team members or investors ask “why?” about a certain part of the forecast. They are the reasoning behind the numbers. Of course, the assumptions are also numbers but from outside the forecast model. What’s the size of the market? How many distinct products will the company sell? At what price? Does the company need more personnel when a new client arrives? These are examples of assumptions that should be answered before the forecast even starts taking shape.

Assumptions are important because they express understanding — or a lack of understanding — of the products, the business model, the clients and the market. The precision of the forecast vs. the real data can vary over time, and all parties, especially investors, are willing to be somewhat flexible in this area. However, they will be much more critical and strict if they are faced with a management team that either made no effort to really answer these key questions or simply had too much trouble finding the right answers. 

3. Building scenarios should be balanced. 

Forecasts should be a balance between confident knowledge of the business and flexibility to allow for changes. The best way to express this is by creating not one forecast, but several. The number of scenarios should also be balanced: one means no flexibility at all, but six might come off as guessing. This doesn’t mean that forecasts can’t be revised and changed over time as new information becomes available, but at a single point in time, it’s best to have a balance. 

Advertisement. Scroll to continue reading.

Scenarios have a tight relationship with the previous point on the importance of assumptions. In the end, the general structure and format of the forecast should suffer very few changes from scenario to scenario. What changes are the assumptions and objectives, precisely to evaluate how the intended results change as well. The typical scenario case is having an “optimistic case,” a “pessimistic case” and a “middle case,” and what’s being qualified is usually top-line sales and bottom-line results.

However, there are more nuanced ways to build scenarios, that can be very useful. One of them is experimenting with different product mixes and the weight they have on the total results. If the company has several products with different profit margins, each particular mix can yield some key takeaways. Another interesting option is altering product prices to analyze the effects on all the lines of the forecast and detect possible efficiencies. 

For startups, the forecasts will improve over time. 

There is no such thing as a perfect forecast, but they can be perfected over time as more real data of the business and the market becomes available. When the business is just beginning, concrete information is rarely available, so it’s important to understand how to make the initial forecasts as useful as possible. 

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?

Source link

Click to comment

Leave a Reply


Social Media

Okay *cracks knuckles* let’s see what the most popular links were on Facebook over the last quarter. Today, Meta has published its latest ‘Widely...


Source: Nintendo The sports party game you control with your actions, Nintendo Switch Sports, has made its way to the latest Nintendo console, much...

Top Stories

Without fail, crypto has a way of humbling even the most self-assured and this market is definitely not for the faint of heart. NFT...


Nvidia has released a software security update display driver for GeForce GPUs which are no longer supported by Game Ready Drivers or Nvidia Studio...


Why it matters: Currently, Apple requires all iOS web browsers to use WebKit – the engine powering its Safari browser. Many consider this policy...

Loan And Finance

Web3 company Medallion, headed up by Matt Jones, the former CEO of Warner-owned concert discovery service Songkick, has raised over $9 million in a...


You May Also Like


Introductions get a lot of attention. I’ve explored the topic of how to write them even though as a reader, I always skip them....

SEO Guide

There are all kinds of pictures of the world on the internet, but to find one of these specific pictures that you want to...

Online Business Success

The internet is now our nervous system. We are constantly streaming and buying and watching and liking, our brains locked into the global information...

Online Business Success

You can think of link building in many ways. I like to call it tedious, painful, and a test of patience. It’s also necessary...