The 7 Deadly Sins of Forecasting
I’m willing to bet business forecasting is on the bottom of your to-do list. Instead, you’re focused on starting the year off on a good foot with your customers, your products and your services. You need to hire a few new people, your lease is up for negotiation and your personal vacation planning is long over due. While all of these are important, forecasting should be right up there with them.
Here’s the good news: The process doesn’t have to be painful. It can be as easy as sitting down with your management team for a few hours and hashing out costs, expenses and expectations. Instead of looking at the process as arduous, try to look at it as building a roadmap for the year.
Here’s the bad news: Failing to commit the time can result in a mountain of headaches and a possible nosedive in your business.
Wade Benz knows this feeling first hand. After founding USimprints.com, a product imprint company out of Nashville, Tenn., he landed a few large clients, accounting for more than 25 percent of his business mix. When the economy collapsed in 2008, customers had to cut spending and retract contracts. “It almost killed us,” he says.
Here's a look at the seven most common forecasting mistakes that small-businesses are guilty of making.
Sin No. 7: Relying on a few big clients
Small-business owners get into dangerous territory when one or two clients make up most of their business. Benz says he got a little too comfortable and failed to factor in the unexpected, completely throwing off his forecasting efforts. When the clients bottomed out, he was left scrambling.
He recovered by tapping into a number of medium-size clients. He focused his forecasting on their numbers alone and now sees big client contracts as “gravy.”
“I really recommend focusing on smaller clients; go deeper, not just wider,” says Benz.
In addition, factoring in unexpected expenses is of utmost importance. Benz says its best to be cautious and build a contingency plan.
Sin No. 6: Not factoring in one-time costs
Over in San Francisco, Raj Sheth is also learning his fair share about forecasting. He’s co-founder of Recruiterbox, an online recruitment software company that launched a little more than 18 months ago. His big piece of advice: Make sure to factor in one-time costs, even if they are far-flung estimates.
“If I think I might need to spend $500 on a lawyer come spring, I will put it into my forecast,” he says. “Or say my current marketing isn’t working and I might need to hire someone for $1,000 to help with that; I am always conservative to put everything in.”
Bottom line: Pay attention to every penny that leaves your business, Sheth says. Failing to forecast costs (not just revenue) will lead business owners down a rocky path.
Sin No. 5: Lack of diligence in recording
Lloyd Jay Fass, founder and president of Fass Management & Consulting, a financial modeling consulting firm in New York City, works face-to-face with small-business owners on a daily basis and sees a variety of mistakes on the forecasting front. One of the biggest problems: poor data input.
“Small business owners often hand receipts to their accountant at the end of the year and have them deal with it,” he says. “That action isn’t going to help them see the reality of what they are doing as a business.”
Fass recommends every business owner use a software program (he suggests QuickBooks) to track revenue and expenses on a regular basis. Separate your products or services into categories to make data more digestible, then forecast per category for more accurate numbers.
Sin No. 4: Expense-cutting optimism
Cutting your expenses can be equated to going on a diet. You promise not to reach for that piece of cake, but when it’s sitting right in front of you, your thoughts change.
Fass offers travel expenses as an example. Your company may have spent $200,000 on travel last year, and this year you’d like to cut that down to $100,000. Is that reasonable? To find out, he suggests breaking out every aspect of travel (i.e. $1,000 for airfare, $2,000 for incidentals, per trip).
“Small numbers can really influence the entire model, so break things down into tiny bits and see if your forecast is even attainable,” he adds.
Sin No. 3: Forgetting employee costs
Human capital is arguably the largest expense in any organization, but should you factor it into your forecasting? Absolutely, says Sheth.
“You need to figure in some percentage for raises even in a bad year,” he says. “And the biggest black hole is commissions. You may have encouraged freelancers and affiliates to push your product on heavy commissions; make sure to deduct this from your revenue.”
Sin No. 2: Failing to factor in depreciation
After buying an expensive piece of equipment to last you 10 years, make sure to factor in one tenth of that price in your forecast every year for the next decade, advises Fass.
“When you need to replace it, you will be ready,” he says.
Sin No. 1: Not taking it seriously
The most serious problem Fass sees with his small-business clients: a failure to take forecasting seriously. Don’t view it just as an accounting function.
“Think of a forecast as your financial business plan,” he says. “Make it simple and connect your objectives.”
Photo credit: iStock