Business Forecasting

What’s In
It does not matter which industry you are in, whether your company manufactures
products or offers services, or whether your company is small or large, you must
have to plan effectively. Being effective is not enough though but you need also to
be efficient. Thus, foreseeing and identifying the financial movement and operation
of the business is a must. With this, it is important to create the business model a
company or enterprise may have. Whether the business is small or big, every
entrepreneur should have a business model. Same with the business plan this will
serve as the blueprint of your business. This is one of the primary reasons behind
every success of every business practitioner. It’s just like putting pieces of the puzzle
together through keen analysis of the business’ future.

What’s New
Generating profit is the main goal of every business’ existence. For income is the
lifeline of all business entity.

Anything you plan is generally based on assumption of something that might

happen in your business in the future. The more accurate these assumptions will
be, the better the plan it is. If an entrepreneur knows what happened in the past
and why, or have insight into what may occur next, he can then predict what is
likely to happen in the future. That is what we call business forecasting.

Forecasting the revenue and expenses incurred is equally important and significant.
Knowing the cash flow should be well attended to and be of focus in overseeing the
business operations. Thus, experimentation through forecasting is a must. Now, let
us learn together the value of forecasting the revenue and expenses incurred of a
business to foresee the business growth and direction in the future.

Understanding the key terms:

1. Strategic Planning is the process of documenting and establishing a direction
of your small business—by assessing both where you are and where you’re
going. The top three reasons strategy implementation fails: Poor
Communication, Lack of Leadership, Using wrong measures
2. Decision-making is choosing between two possible course of action and it
involves choosing between possible solutions to a problem.
3. Finance is defined as the management of money and includes activities such as
investing, borrowing, lending, budgeting, saving, and forecasting.
4. Accounting is how your business records, organizes, and understands its
financial information.
5. Expected cost is the cost in cost accounting estimated in advance of
production or construction.

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6. Revenue is the value of all sales of goods and services recognized by a
company in a period.
7. Profit is the positive gain remaining for a business after all costs and expenses
have been deducted from total sales.
8. Cost-effective is something that is a good value, where the benefits and usage
are worth at least what is paid for them.
9. Repayment plan is a way to pay back a loan over an extended period of time,
generally by making fixed monthly payments.
10.Cash flow statement (CFS) measures how well a company manages its cash
position, meaning how well the company generates cash to pay its debt
obligations and fund its operating expenses.

What exactly is business forecasting?

Business Forecasting is the process of using analytics, data, insights, and
experience to make predictions and respond to various business needs. The insight
gained by Business Forecasting enables companies to automate and optimize their
business processes.

Business forecasting is an act of predicting the future economic conditions on the

basis of past and present information. It refers to the technique of taking a
prospective view of things likely to shape the turn of things in foreseeable future. As
future is always uncertain, there is a need of organize system of forecasting in a
business.

Goal of business forecasting:

- go beyond knowing what has happened and provide the best
assessment of what will happen in the future to drive better decision
making.

Many people think of a Business Forecast as how many of something we will sell
next week. That is part of it but Business Forecasting can encompass anything that
identifies the likelihood of a future outcome, provides comparative information using
analytics, or drives data-driven business decision.

Importance of Business Forecasting

Business Forecasting can be used for:

1. Strategic planning and decision-making (long-term planning)
2. Finance and accounting (budgets and cost controls)
3. Marketing (consumer behavior, life cycle management, pricing)
4. Operations and supply chain (resource planning, production, logistics, inventory)

Five(5) Fundamentals of Business Forecasting

1. Forecasting is essential to sustainable success

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To run a successful business, you need to match demand and supply. In order to
understand and prepare for future demand, businesses must create forecasts.

Demand forecasting – the process of estimating the future demand of a product

in terms of a unit or monetary value – is a fundamental part of supply chain
management.

If you run a seasonal business, understanding the peaks and toughs of previous
demand and incorporating them into your current business forecast allows your
business to better manage its inventory. With an informed forecast, you can assess
what amounts of stock should be maintained, what raw materials are likely to be
required, and also what workforce you’ll need to fulfill orders.

Forecasting helps you to fully understand expected costs, revenue and profits,
which in turn impacts process management across the entire business.

In terms of workforce management, it has a significant impact on staff recruitment

and HR activity. And business forecasting also informs product strategy. Analyzing
and predicting potential future growth in demand, cash flow, sales and profits helps
identify the right time for new product development and launch.

It also helps a business to adapt its overall cash flow strategy in line with predicted
outcomes and growth aspirations. Understanding the most likely outcome for sales,
revenues and profits helps ensure that any borrowing or repayment plans are
scheduled for optimum cost-effectiveness, maximum opportunism and minimum
risk.

2. Your business forecast should mirror your business plan

Business forecasting is concerned with understanding what could realistically

happen based upon your historical performance.

Business plans include the growth aspirations of the business and are arranged
around a set of goals. They describe what the business wants to achieve, based on
a set of assumptions. They provide the vision for the business, and shape all
decisions moving forwards.

Having a business plan with clear targets is key to developing a relevant business
forecast. Your business plan should inform your business forecast methods,
assumptions and relevant data points. Your forecast findings should then help to
inform your business plans.

Therefore, it is crucial that business forecasts are continually reviewed and

reassessed to maintain accuracy and alignment to your goals. Continual analysis of

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business performance against forecasts and regular reviewing/refreshing ensures
that the forecast remains current and a useful management tool.

This helps to inform a robust and relevant business forecast, and in turn, a
sustainable business plan. In short, you must keep your forecast methods and
assumptions as fluid as possible, and closely linked to any alterations in your
business plan.

3. Business forecasting methods and processes

The basic process of forecasting is essentially the same, whatever the methods
employed:

• A problem is selected – e.g. ‘what will our sales look like in October next
year?’
• Relevant data points are chosen – what variables and how to collect them?
• Assumptions are made to simplify the process and cut down on time and data
• A forecasting model is chosen that is suitable for the above points
• The data is analyzed and the forecast is drawn up
• The forecast is verified through comparison to actual events and performance

There are two main methods of forecasting: qualitative and quantitative.

1. Quantitative forecasting is concerned with data.

Businesses that have been established use primarily historical data of their
own performance, combined with market and other macroeconomic factors.

For existing businesses, the most common business approach in this method
includes:
1. Time Series Analysis is the analysis and extrapolation of this
historical data to provide an indication of future performance or
demand. It is the most common type of business forecasting and
forms a large part of many business’ approach. Due to its reflective
nature, this is only generally useful for existing products and
services.

2. Historical trend analysis looks for stable, upward or downward

trends and patterns in historical data, including industry changes,
and technological, cultural, and political developments.

With these methods, the more historical data there is, the better. This makes
them less useful for businesses and markets that are relatively newly
established.

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If your business is new, or has less or lack of historical data to work with then
use either the following:

▪ naive approach to data – that assumes the upcoming period

demand will be the same as current – can be more useful.

Let say for example your cupcake sales in the month of

December 2020 to January 2021 holiday season will be also your
target sales for December 2021 to January 2022 holiday season.

▪ moving averages’ approach where the forecaster averages out

the last 3 months then uses that as the forecast for the next month.
This can be particularly useful if there is very little trend data to
work with. Say for example having sales of cupcake as follows:
January February March Total Sales AverageSales for
3 months(Total
Sales/3)

P10,000.00 15,000.00 5,000.00 30,000.00 P10,000.00

Projected
sales for April

2. Qualitative business forecasting models are generally used for short-

term predictions, or for when data is scarce – for example, when a new
product is first introduced to market.

They consist of the following approaches:

➢ Expert opinions – what do experienced executives think will happen
➢ Delphi method – conducting surveys, interviews, and phone calls to a
panel of experts (outside the business) from multiple areas and try to
reach a consensus.
➢ Talking to your sales force and asking them to predict sales based on
performance and other variables
➢ Market surveys – Asking customers their opinions, preferences, etc. to
gauge demand.

Qualitative business forecasting can come up against limitations due to its

reliance on subjective opinion rather than concrete, measurable data points
and trends. For example, salespeople are likely to overestimate how much
they will sell. Problems can also arise if there is a lack of consensus among the
experts polled.

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The reason for some people reject business forecasting and deemed it unnecessary,
waste of time, money and energy even of the many advantages is the fact that
despite all precautions, an element of error is bound to creep in the forecasts and
we cannot eliminate guesswork in the forecasts. It is also felt that forecasting is
influenced by the pessimistic or optimistic attitude of the forecaster.

It may not be possible to make forecasts with a pin-point accuracy but it still cannot
undermine the importance of business forecasting. The management should first
make use of statistical and econometric models in making forecasts and then apply
collective experience, skills and objective judgement in evaluating the forecasts.

Further, the forecasts should be constantly monitored and revised with the changed
circumstances.

There will always be limitations with forecasting due to the nature of forecasting,
the goal is not to be able to create a 100% accurate prediction of future
performance and events. It’s simply to formulate the best guess or estimate based
upon the available relevant information.

Aiming to paint a realistic and informed picture of how the next week, month, year,
and even decade will play out, however, comes up against inherent limitations.

1) Data quality
Due to the historical nature of the data used in qualitative forecasting
methods, it is always old. If your data is not used regularly, the quality of it
can decay. Errors go undetected, and inconsistencies go unnoticed. It must be
used or checked regularly to ensure the data is robust enough to provide
useable analysis. Solid, fresh data with more assumptions applied is better
than old, rarely used data.

2. Bias
Forecasts, as with any predictions, are often biased to some degree. This is
difficult to eliminate as the set of assumptions (which data points or factors
to use, and how to weight them etc.) will likely always add bias to the results.

3. Methodology
Forecasting is, by it’s nature, never totally accurate, and always evolving. If
your forecast does prove to be correct (or highly accurate), it’s important not
to assume that this was due to your brilliant forecasting methodologies and
sound logic. A correct forecast does not prove your forecast method is correct
– it could have been down to sheer good luck. Always check and reassess
your methods.

Robust, informed forecasting is always an iterative process. The more

iterations and the better it is attached to real costs and coherent assumptions
– the better the forecast will be.

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 4. Unexpected events
Forecasting generally assumes overall economic stability and no significant
changes in the industry or market. However, there is no guarantee that
conditions in the past will carry over into the future. This makes historical
data and trend analysis limited as a standalone method for future predictions.

External unexpected events (think of the subprime mortgage meltdown) can

instantly undermine assumptions and render a forecast irrelevant. It is
impossible to factor in completely unexpected events. Therefore, there needs
to be flexibility built into any business forecast.

4. Keep it simple where possible

Constructed forecast should be simple to understand and provide information

relevant to the strategy of the business. They should also be easy to adjust. The
simpler the methodology used, the easier it is to understand, analyze, and figure out
why, should anything go wrong. If a method is too complex, it can obscure key
assumptions and reasons for failure.

When it comes to cash flow forecasting, Rodney Schwartz, CEO at ClearlySo advises:
“The simpler the better – one of the best is just a projection of the bank balance”.

Finding a simple, flexible cash flow solution is key to maintaining the agility and
financial robustness essential to sustainable growth. Unexpected events – either
positive or negative – can be managed with more confidence, knowing that your
working capital fund is backed up by an easy to access, cost effective and flexible
finance facility.

Scientific business forecasting involves:

(i) Analysis of the past economic conditions and

(ii) Analysis of the present economic conditions; so as to predict the future
course of events accurately.

In this regard, business forecasting refers to the analysis of the past and present
economic conditions with the object of drawing inferences about the future business
conditions. In the words of Allen, “Forecasting is a systematic attempt to probe the
future by inference from known facts. The purpose is to provide management with
information on which it can base planning decisions.

Steps or elements of Forecasting:

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 Estimating Future Reviewing the
Developing the Basis Regulating Forecasts
Business Operations Forecasting Process

1. Developing the Basis:

The first step involved in forecasting is developing the basis of systematic

investigation of economic situation, position of industry and products. The future
estimates of sales and general business operations had to be based on the results
of such investigation.
The general economic forecast marks as the primary step in the forecasting
process.
• Do you have an existing competitor in the neighborhood?
• Is your price competitive and fits your target market?

2. Estimating Future Business Operations:

The second step involves the estimation of conditions and course of future events
within the industry. Base on the information/data collected through investigation,
future business operations are estimated. The quantitative estimates for future
scale of operations are made base on certain assumptions.
• What is the demand of your product? Is it still in demand 2-3 years from?
Can you maintain the product quality and competitiveness considering the
location?

3. Regulating Forecasts:

The forecasts are compared with actual results to determine any deviations. The
reasons for his variations are ascertained so that corrective action is taken in future.
• Is there any deviation between your forecast and the actual result? How
big is the difference?

4. Reviewing the Forecasting Process:

Once the deviations in forecast and actual performance are found the improvements
can be made in the process of forecasting. The refining of the forecasting process
will improve the forecast in the future.

• Did you identify significant data? Are you still into further data collection?

Sources of data use in Business Forecasting:

Collection of data is a first step in any statistical investigation. It is the basis for
any analysis and interpretations. Before collection of data, many questions shall
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occupy the mind of the manager. The manager must be able to answer these
questions before task of collection is started.

These questions are:

1) Why to collect data?
2) What kind of data to be collected?
3) When It is to be collected?
4) Where from it should be collected?
5) Who will collect it?
6) How it shall be collected?

Planning for data collection refers to thinking or preparing before doing the
actual task of data collection. The purpose or object of data collection, the scope of
the data, the unit of data collection, the technique and sources of data are the
important consideration in planning the data collection.

Data may be collected from primary or secondary sources depending upon the time,
resources, and purpose of the investigation.

(i) Primary Sources:

It is a first-hand data collected personally by the investigator. It is costly and
time consuming. Primary data is collected if secondary data is not available.
It is collected through personal interviews, questionnaires or observations.

(ii) Secondary Sources:

These sources of data refer to already published data or data collected by
other agencies. It is a secondhand data. Here task is more of a collection and
compilation of data. Lot of care and caution is necessary before using the
secondary data. Such data is cheaper, quick to access and easily available.

The sources of secondary data are:

(a) Official reports of the government.
(b) Financial institutions etc.
(c) Annual reports of the company
(d) Journals, Newspapers, Magazines etc.

Forecasting is important so that an entrepreneur can foresee the possibility and can
make adjustment before business starts to operate. Thus, an entrepreneur must
identify a sustainable and realistic profit margin to sustain the business operations.

How to Solve Profit with Cost & Revenue?

To determine if a business is successful, you must look at costs, revenues and
profits.
Some may think that revenues and profits are the same thing, but they are not.
Companies can have very high sales numbers, but this does not automatically
translate into profits. As Bean Ninjas explained, costs and revenues must be
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balanced
effectively by a business in order to be
successful.

What is Revenue?
If a business owner does not understand the difference between revenue and profit,
they may not realize if their company is in trouble. Normal business activities are
intended to generate income.

This income is also called sales revenue, and it can be calculated as follows:

sales revenue = sales price × number of sold units (less deductions for
discounts and returned item)

This equation reveals a company’s gross revenue for a given time period.

Once expenses like overhead costs are subtracted, you are left with the company’s
net sales revenue. When the net sales revenue exceeds the expenses during a given
time period, the resulting number represents the company’s profit.

If, for instance, 8Goodies Bakery sold 100 cupcakes priced at P5.00 each in
October, so his gross sales revenue for that month would be P500.00. He
would then subtract his costs (ingredients, labor, rent, etc.); if the costs were
P100.00, his net sales revenue would be P400.00.

The cost of revenue is another way of categorizing operating costs. This includes all
of the expenses associated with manufacturing and distributing products and
services to end users. They can be direct or indirect, and can include buying
materials, labor, production, marketing and salaries.

Defining a Company’s Profits

Revenue – Costs =
Profit
Though this profit equation is simple, making a respectable profit can be difficult;
otherwise, companies would never go out of business.

Understanding the concepts of profit markups and margins are essential for
business owners who want to succeed. A markup is the amount that is added on
top of the total product cost price.
For example, say a pair of shoes costs a company P50.00 to acquire from the
manufacturer. They are put on display with a P60.00 price tag. That extra P10.00
is the markup.

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Profit margins help establish how well a certain product or service performs, or how
much money it makes for the company. The percentage figure gauges how many
cents the business makes for every peso in sales, while accounting for the costs
involved. In

essence, higher profit margins indicate that a company is doing better than when
their profit margins are lower.

Calculating Profit Margins

Profit margins can be calculated using a company’s gross, net or operating profit.
Most reflect net profit margins, which pinpoint the percentage of sales that are
actual profit.

As Xero Accounting explains, here is the basic formula to use:

Net income ÷ net sales = net profit

margin

This divides the net income by total sales revenue. The net profit margin can be
factored into operating costs, costs of goods and services sold and taxes. So, if a
company’s yearly net income was P25,000.00 and the net sales were P50,000.00
the net profit margin would be 0.5% percent.

Additional Example Profit Calculations

Here’s another example. In 2019, Dos Kiddos Food Business brought in

P10,000,000.00 in sales. It cost the company P7,500,000.00 to manufacture the
products, plus P1,500,000.00 in operating costs.

Dos Kiddos Food Business had a net profit margin of 10%. This means that 10
percent of the company’s total sales revenue was profit.

Total sales – (total operating costs + the cost of goods sold) = net
income P10,000,000.00 - (P7,500,000.00 + P1,500,00.00) =
P1,000,000.00

Net income ÷ sales = net profit margin

P1,000,000.00 ÷ P10,000,000.000 = 0.1%

0.1 × 100 = 10%

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 What I Have Learned

Instructions: Compute the forecasts of your business, 12 months monthly net

income, one-year profit and profit margin. Use the given template as your guide.
Explain briefly if your computation can sustain the business operations.

Fiscal Year 20__ - ___ Sales Summary:

Name of Product:

Month Cost of Selling Total Sales Monthly Operating Net Net

the Price unit Revenue Cost (may include Income Profit
product sold Fare, lights & Margin
water, labor, other
expense)
January
February
March
April
May
June
July
August
September
October
November
December
Grand
Total
Less: Other Yearly Expenses (Licensing Fee etc)
Net Income: (Total Monthly Net income - Total monthly revenue-Other
yearly expenses)
Net Profit Margin:

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 What I Can Do

Now let’s summarize and finalize your business plan!

Instructions: Finalize your Business Plan using the template given below based on
your business. Follow the guide template below:
Note: Individual task. Leaders will consolidate the output of the members.
Business Plan Template

Includes Company name, address, history how the

I. Introduction business started, Vision, Mission, objective or
Goals & Business Model
Summary of the whole Business Plan like product offering
II. Executive Summary
and target market
III. Business Proponents Organizers of the business with their capabilities
Includes the 7 P’s of marketing mix, etc.(state 7Ps here)
• Product __________________________
• Price _____________________________
• Place _____________________________
IV. Marketing Plan
• Process ___________________________
• People ____________________________
• Physical Evidence _________________
• Promotion _________________________

V. Financial Plan Forecasted sales revenue, expenses and returns

Type or structure of Business and

Competitiveness strategy (how your business will
VI. Operational Plan
operate from purchasing of raw materials until delivery
of goods to the customer)

Human Resources which includes management and

VII. Organizational Plan
employees with job descriptions

Assessment
Multiple Choice: Write your answer clearly on a separate sheet of paper. Choose
the letter of your correct answer.

1. What is the cost in cost accounting estimated in advance of production or

construction?
A. Expected cost C. Profit

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 B. Mark-up D. Profit Margin
2. What describes what the business wants to achieve, based on a set of
assumptions?
A. Business Plan C. Profit
B. Demand D. Revenue
3. What is an analysis and extrapolation of this historical data to provide an
indication of future performance or demand?
A. Historical Trend Analysis C. Profit Analysis
B. Loss Analysis D. Time Series Analysis
4. What is defined as the management of money and includes activities such as
investing, borrowing, lending, budgeting, saving, and forecasting?
A. Accounting C. Human Resource
B. Finance D. Marketing
5. What is the positive gain remaining for a business after all costs and
expenses have been deducted from total sales?
A. Mark-up C. Profit
B. Profit Margin D. Revenue
6. What is the value of all sales of goods and services recognized by a company
in a period?
A. Mark-up C. Profit
B. Profit Margin D. Revenue
7. What is an amount that is added on top of the total product cost price?
A. Mark-up C. Profit
B. Profit Margin D. Revenue
8. What helps establish how well a certain product or service performs, or how
much money it makes for the company?
A. Mark-up C. Profit
B. Profit Margin D. Revenue
9. What is the process of estimating the future demand of a product in terms of
a unit or monetary value – is a fundamental part of supply chain
management?
A. Business Plan C. Qualitative forecasting
B. Demand forecasting D. Quantitative Forecasting
10. What is an act of predicting the future economic conditions on the basis of
past and present information?
A. Business Forecasting C. Qualitative forecasting
B. Demand forecasting D. Quantitative Forecasting

11. What are generally used for short-term predictions, or for when data is
scarce?
A. Business Forecasting C. Qualitative forecasting
B. Demand Forecasting D. Quantitative forecasting
12. What is the process of using analytics, data, insights, and experience to
make predictions and respond to various business needs?
A. Business Forecasting C. Qualitative forecasting

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 B. Demand forecasting D. Quantitative Forecasting
13. What is the process of documenting and establishing a direction of your
small business—by assessing both where you are and where you’re going?
A. Business Forecasting C. Quantitative Forecasting
B. Decision-making D. Strategic Planning
14. What is meant of choosing between two possible course of action and it
involves choosing between possible solutions to a problem?
A. Business Forecasting C. Quantitative Forecasting
B. Decision-making D. Strategic Planning
15. What is something that is a good value, where the benefits and usage are
worth at least what is paid for them?
A. Cost-effective C. Mark-up
B. Expected Cost D. Revenue

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https://www.yourdictionary.com/cost-effective
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https://www.ngdata.com/what-is-business-analytics/
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itvaluable-2-43 https://www.pay4.com/5-fundamentals-of-business-forecasting/
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plantemplate-a-step-by-step-guide-for-entrepreneurs/?
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