Learn 6 Ways to Forecast 👇

Each time I build a forecast for a client, I work on first getting to know their business.

I ask questions like…

How do you make money?

What are your plans for growth?

What is currently happening with your business?

From there, I start to formulate a rough idea for how we’re going to build our forecast…

but each section of the Profit & Loss and Balance Sheet may require a different approach.

While they all differ, almost all forecasts I build include one / all of these 6 methods:

1️⃣ 6 mo. historical average

How it works → take the last 6 months value. Can take it one step further by adding a buffer (like a 5% increase)

Why it’s useful → The future often times blends well with the past, especially in the first few months of projections

2️⃣ Prior mo. balance

How it works → Set your projection to last months value

Why it’s useful → extra helpful when forecasting the balance sheet for accounts with minimal movements

3️⃣ % of revenue

How it works → Set your projection to take a % of revenue

Why it’s useful → As revenue scales, expenses tend to scale as well

4️⃣ $ per hire

How it works → Set a $ figure for each hire

Why it’s useful → Expenses / capex often times scale with each new hire

5️⃣ YoY Growth

How it works → take the value from 12 months prior and add a growth factor

Why it’s useful → for companies with seasonality, you can match the schedule from the prior year, and add a buffer if need be

6️⃣ Annual inputs

How it works → Enter in assumptions for the entire year, then divide by 12 for monthly projections

Why it’s useful → simple and quick way to forecast for an entire year

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So which is the right method?

There is no right one method for a business…each line item on your general ledger should be analyzed as you choose the best forecasting method.

As a general idea, I typically start out with making all opex accounts other than headcount a 6 month average…and every balance sheet account other than cash + retained earnings equal to last month.

From there, I can add more and more detail as necessary.

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