Forecasting or projections are the core of the financial data in any business plan. Forecasting is a process of projecting the future. In order to get anywhere, you need to identify your destination before you can determine the best route for getting there. The same is true in your business. Forecasting is a process of identifying that destination and then establishing a rough map for your businesses’ future activities. It’s not 100% accurate, but accurate enough to locate prominent hazards and to establish direction for the business to follow.

Forecasting is based on carefully reasoned assumptions, quantified in a systematic way to make your projections about what will happen in the future as accurate as possible. By taking a systematic approach to forecasting, you gain a deeper knowledge and understanding of your business. Add the concept of break-even analysis (This is explained in Step 6.d – Breakeven Article), and you have a powerful tool to improve decisions regarding expansion, pricing, product mix, advertising, staffing, and many other areas of your business management system.

The final product of your forecasting effort becomes your projected cash flow (This is explained in Step 6.e – Cash Flow Article), the basis of the cash budget, which in turn is the primary tool for controlling your business. The purpose of the forecasting process is twofold: it affords an excellent opportunity to review the past and it provides the best guide to the future your business can have.

Forecasting often seems like a very mysterious process. Obviously, no one can know for sure what is going to happen in the future. It is possible, though, to make reasonably accurate predictions based on a logical assessment of the facts that are available to you now. There is no magic to it, no crystal ball. There is instead, a careful analysis of past and current business practices, a degree of extrapolation of current trends (sales, expenses, major economic shifts such as inflation, and others), and a great deal of creative examination, evaluation, and revision of the assumptions you use to operate your business.