How to Boost Your Bottom Line With Forecasting

7 min read

July 3rd, 2024

Most commonly associated with weather, forecasting is also an essential business tool; it can be used to predict whether your business will experience a dry spell or a windfall and help you develop an effective strategy and boost the bottom line of your business. 

What Is Forecasting and What Is My Bottom Line?

Forecasting Definition

In business, forecasting most commonly refers to financial forecasting. The technique makes informed projections of future trends using historical data.

Bottom Line Definition

The term "the bottom line" refers to the actual bottom line of a company's income statement where the business's profit (or net income) is reflected. The term "bottom line" is frequently used as another word for profit. 

How Forecasting Can Boost Your Bottom Line

If you're a business leader, then you already know that one of the primary ways for a business to be considered successful is to have a healthy bottom line. In other words, in a for-profit business, profits are the goal. There are many strategies for increasing your bottom line: cutting costs, generating more revenue, optimizing your prices, focusing on products and services with the best profit margins, etc.

Read More: The Pros and Cons of Outsourced Accounting Services for Businesses

So, forecasting is just one of several bottom-line-improvement strategies. However, forecasting can help you to improve your bottom line in several different ways, such as:

• Better decision-making and strategy
• More accurate financial planning and budgeting
• Healthy, stabilized cash flow
• More accurately identifying and negotiating risks
• Identifying and leveraging opportunities as they arise
• Optimizing prices for anticipated cost increases
• Perfectly timing hires for optimal productivity
• Better performance evaluation

5 Forecasting Best Practices for Better Results

1. Understand Where Forecasting Fits in Your Business's Operating Framework

Forecasting is an integral component of a simple operating framework or planning cycle which includes the following steps:

• Collecting and Analyzing Data - Gather data and evaluate it. What does the information reveal regarding your performance, projects, industry, and the economy?
• Identifying Trends - Look for patterns in performance, the industry, the economy, revenue, and costs.
• Forecasting Performance - Think about the trends you have identified and your business. Consider whether or not the trends you identified are likely to continue, accelerate, or slow. 
• Strategizing and Budgeting - Based on your projections, plan a strategy and create a budget for the upcoming financial period. During this step, consider, for example, whether you need to account for inflation or the hiring of additional employees in your costs. 
• Strategy Execution, Evaluation, and Adjustment - Begin executing your strategy while routinely comparing your budget to actual numbers. If necessary, make adjustments along the way to account for budget variances. This will help your business stay on track with its plan. 

2. Start Collecting Data Yesterday

Your business's data is the foundation of forecasting. Without complete, accurate, up-to-date data, you simply won't be able to forecast effectively.

Read More: Financial Reports vs. Management Reports: What’s the Difference?

If you do not have the proper systems in place for data collection, your business needs to make moves now to get its back office in order. Most data collection can be automated, thanks to myriad powerful accounting software systems and enterprise resource management tools (such as those available with QuickBooks or Sage Intacct). 

The more data your business has to analyze and the longer its history, the better its forecasting will become. 

3. Consider the Various Forecasting Methods

In addition to needing to collect data, it's also vital that your data is collected, categorized, and reported in a consistent, accurate, and standardized method. This ensures that you're comparing apples to apples during data analysis, instead of looking at, let's say, monkeys and bananas. 

Having a sound bookkeeping and accounting system in place in addition to written policies and procedures for your back office will help ensure that your data is reliable. 

4. Consider All of the Relevant Factors in Forecasting

Several categories of forecasting are relevant to business. The two most important are costs and revenue. However, countless factors can impact costs and revenue. As a result, for more accurate financial forecasting, it's smart to consider several factors, such as:

• Economic Factors - How is the financial market performing? What is the current trend with inflation rates?
• Supply Chain Factors - Have you experienced supply chain challenges? How have they impacted your productivity, costs, and revenue?
• Political  Factors - Are there new regulations, taxes, grants, tax credits, or government spending that will affect your business?
• Technological Factors - Are emerging technologies hurting or helping your industry? What impact can your business expect?
• Environmental Factors - Is the green movement impacting your industry? How can you leverage environmental concerns to position your business as an industry leader? 
• Social Factors - Have certain social factors such as an aging population, employee expectations, trends, and changing demands impacted your industry? How has your business responded?

Considering these types of factors and whether or not they are likely to continue, slow, or accelerate can help you think more accurately about the future of your industry and company. 

All of the projections and predictions you make ultimately contribute to forecasting for a budget (i.e. attempting to accurately project your future costs and revenue). This enables you to develop a solid financial strategy to support your business strategy and goals with a more accurate budget (spending plan). 

As a result, the method of budgeting you choose for your business will also have an impact on the way you forecast in your business. For example, zero-based budgeting starts from scratch with every new budget, forcing you to scrutinize and consider every line item in your budget to forecast how it might change in the coming year. On the other hand, incremental budgeting uses a forecasted growth rate to determine budget adjustments for the upcoming financial period. 

The Top 6 KPIs Every Business Leader Should Have At Their Fingertips

The One Page Scorecard Guide 

[FREE DOWNLOAD]

5. Consider the Various Forecasting Methods

There are several different methods of forecasting available. The one that's right for you will depend largely on which aspect of your business you are attempting to forecast, the kind of information you have available, and the forecasting tools (and expertise) at your disposal. 

In general, there are four basic forecasting techniques:

• Straight Line Forecasting - This method uses historical data to base projections on a constant growth rate.
• Moving Average Forecasting - This method uses historical data and repeated forecasts to determine a likely projection.
• Simple Linear Regression Forecasting - Slightly more complex, this technique uses statics and a sample of data or observations to compare an independent variable with a dependent variable, setting up "if-then" scenarios.
• Multiple Linear Regression Forecasting - An even more complicated form of forecasting, this method uses statistics and a data sample to compare multiple independent variables with one dependent variable. 

In a business, it can be prudent to look at using several methods of forecasting so that you can compare results and see which methods work best for you. Considering these techniques more concretely, your business can use financial reports such as trailing twelve-month (TTM) charts to evaluate your trends and extrapolate rates for use in projects.

Additionally, depending on what aspect of your business you are forecasting, one method or a particular data set might be more desirable or relevant than the others. For example, there are several cost forecasting methods to choose from, but depending on your employees, their performance and productivity, and changes in wages in addition to vendors, vendor relationships and agreements, historic trends, inflation, and the economy, you might choose to use one form of cost projection over another. 

Reap All of the Financial Forecasting Benefits With Outsourced Accounting for Businesses

With a well-designed and flawlessly executed forecasting strategy, your business will position itself ahead of the curve. As a result, you can reap all the rewards of financial forecasting, including:

• Less stress and smoother operations
• Improved strategy
• Perfectly timed hires
• Better decision-making
• More confident leadership
• Healthier cash flow
• Simplified budgeting
• SMART-er goal-setting

The idea of establishing a high-powered bookkeeping and accounting system and equipping your back office with the tools, team, and technology required for your business to produce accurate and effective financial forecasts can be overwhelming. It can also seem unaffordable and out of reach - especially in small and medium-sized businesses. 

With an outsourced accounting service provider, however, you can establish a back office that goes to work for your business, improving your forecasting, budgeting, cash flow, and - most importantly - boosting your bottom line.