There was a time, not long ago, when businesses made decisions based on instinct. Not so these days.
Today, organizations have the luxury of basing decisions on veritable data sets and quantifiable historical trends, delivered by computer-enhanced models with unprecedented accuracy.
In the accounting software world, we call this forecasting.
In a recent Gartner survey, 77% of respondents claimed that managing the forecasting process was among their top three business performance initiatives, far and away the most-cited strategy (full report available to Gartner clients).
What does this mean? Businesses know they need to forecast, but aren’t 100% confident in how to do it. They recognize the consequence of failing to forecast (or forecasting inadequately): a missed opportunity to overcome obstacles, optimize workflows, and increase revenue.
If you’re one those businesses, don’t worry—we’ve got your back.
Here’s what we’ll cover:
What is forecasting in accounting?
How accounting software can help with forecasting
Forecasting methods: How to efficiently forecast using accounting software
Next steps: Moving forecasting to the forefront
What is forecasting in accounting?
But here’s what forecasting is not: budgeting. Though complementary and often lumped together, budgeting and forecasting are not synonymous, representing opposites sides of the same business-performance coin.
Put simply, budgeting spells out desired financial results, while forecasting projects actual results.
Think of these processes as peas and carrots for your business—equally nutritious but distinct in color and shape. Both are essential components of modern accounting software, yet present two very different types of information.
How accounting software can help with forecasting
Accounting software’s quantitative forecasting methods help businesses anticipate future performance based on historical data and trends. In this era of intelligence-driven accounting, an array of budgeting and forecasting software options exist.
This isn’t a new concept, per se; businesses have used manual forecasting methods for decades, though the efficiency and accuracy of such methods were anything but reliable.
The difference today lies in the power of artificial intelligence and automation. With the click of a mouse, software users can execute near-instantaneous projections and uncover actionable, previously unattainable insights.
Forecasting methods: How to efficiently forecast using accounting software
Knowing you need to forecast is only the beginning. To gain a clear and comprehensive understanding of your business’ financial data, you have to know what to measure—and how to measure it.
What to forecast
While needs and goals will always differ among businesses, there are three primary components all organizations should focus on:
- Costs include obvious expenses (e.g., wages, rent, insurance, marketing, etc.), but also some not-so-obvious ones. For businesses that sell physical products, cost of goods sold (COGS) is an especially important metric to evaluate, projecting future costs associated with manufacturing or stocking goods (things like raw materials, machine upkeep, freight, and labor).
- Revenue forecasting estimates income generated through sales and other means. Typically, this is done by measuring past revenue amounts over a fixed time period, and then tweaking projections based on recent sales performance and potential seasonal fluctuations.
- Market trends are a bit more abstract, and thus harder to pin down. But as with any data-based projection model, businesses can use forecasting to get as close as possible to predicting future market conditions and their impact on cash flow. This includes things like potential staffing needs, inventory levels, raw materials availability, and interest or inflation rates.
How to forecast it
After you identify which data points to track, it’s time to get to work. First you’ll need to decide the scope and frequency of your forecasts (weekly, monthly, quarterly, or annually). Keep in mind that conclusions can differ pending on your cadence, but the more you analyze, the more holistic and informed your analysis will be.
The analysis portion is where things get tricky. There’s no one right way to forecast; methods vary depending on your forecasting objective, the nature of your data, and the preferred working methods of the analyst. However, there are some proven quantitative approaches worth considering, including:
- Rule of thumb—the most straightforward approach—essentially uses past performance as a direct indicator of future performance. In other words: It’s projection based on precedent.
- Smoothing averages past results to account for any statistical anomalies or irregularities. Some weighted forecasting models place more emphasis on recent data, painting a more realistic picture of future performance.
- Decomposition breaks down historical data into components, typically based on seasonal performance, directional trends, and various cyclical factors. Think of it as a more targeted version of the rule of thumb method.
- Regression analysis examines the causal relationship between two or more variables (e.g., how a football team’s performance impacts merchandise sales, or what the arrival of flu season does for pharmacy foot traffic).
Your preferred analysis method can and should change depending on your unique forecasting and accounting objectives. You’re likely to use all of them at some point, so keep an open mind.
Don’t just use the method that gives you the desired result; the more perspectives you include, the more objective your forecasting will be—something all businesses should strive for.
Next steps: Moving forecasting to the forefront
And there you have it, a brief overview of how forecasting in accounting software can help your business succeed. So what now?
If you’re looking to implement forecasting—or improve your current forecasting and accounting processes—here’s what you need to do:
- Identify essential metrics and KPIs. Referencing the cost, revenue, and market trend metrics outlined above, consult with business leaders and department heads to determine the specific data points you’d like to forecast. This will help identify the accounting solutions best-suited to your business.
- Find the right software. If you’re dissatisfied with your current accounting software’s forecasting capabilities—or if you’re simply looking for new software in general—our list of budgeting and forecasting solutions is a great place to start. From there you can browse through top-rated products, read reviews from verified users, and read our comprehensive buyers guide.
- Give us a call. Still on the fence? Our friendly and dedicated software advisors are at the ready, and awaiting your questions. For a free 15-minute phone consultation, call (855) 998-8505.
