So, what is the purpose of business forecasting?
Let’s talk about forecasting. And nope, we don’t mean choosing rain boots or sneakers based on the weather. We’re talking about business forecasting to plan for the future (but we’ll leave the tarot cards at home for this one).
Thinking about your business’ future might seem a bit obvious, yet not many people do it effectively.
If you are a course creator, and your goal is to make $80K by year-end – that’s great and absolutely measurable (which we’ve talked about in the past). The problem is, it’s not actionable.
A business forecast helps you formalize your goals with measurable targets, and more importantly, understand what you need to do to hit your sales goals.
If this is already sounding overwhelming, don’t worry – we got you! Keep reading, as we provide forecasting examples and a business forecasting template that will make this process a whole lot easier!
Let’s get started with a couple business forecasting methods
We recognize that business and finance lingo can be a little intimidating if it’s not directly related to your profession (or you weren’t a finance major). Still, there is power in stepping outside of your comfort zone, especially when it comes to intentionally planning your business growth.
Eleanor Roosevelt said, “do one thing every day that scares you,” and we are here for it!
Now, could you hire someone to take care of all this for you? Of course (and you still can), but it’s not an option for many small businesses and entrepreneurs, so we are here to help!
We are going to look at two business forecasting methods:
- Top-down forecasting
- Bottom-up forecasting
Before we dive in, here are a few business forecast model definitions
In business forecasts and projections, you use inputs to calculate outcomes.
Inputs are the numbers we set, and they are often ratios set based on our actual results. They are typically referred to as our business levers, as we have more control over these numbers.
Outcomes then are the numbers we calculate. Typically, in models, these are the volume of customers, sales, leads, website traffic, etc.
As an example, your website conversion rate would be a model input, and we would set this based on our actual website conversion results (or desired results). We either assume that our inputs will stay constant with the current state, or we can adjust inputs if we plan to make tactical changes that would impact the input (improving site usability would increase conversion rate). Then we use conversion rate (our input) to calculate the number of leads or purchases on our site (outcome).
Now that we’re clear on inputs and outcomes let’s talk about…
The top-down forecasting approach
This is a higher-level approach businesses use for an annual projection or something similar. You start with a profit goal, and then you break it down step-by-step to understand what you need to do to meet that goal (web traffic, ad-spend, etc.) So, you start at the top and work your way down (thanks, captain obvious).
A typical model might look like this, where the “y” values are calculated based on your “x” inputs:
- x profit target
- x margin -> y revenue
- x average spend per customer -> y customers
- x customer conversion rate -> y visits
So basically, you start with your ideal profit target. Then you fill in the “x” inputs with your current or desired results (or if you’re not sure, you can find industry averages with a quick Google). Then the model tells you how many site visits it will take to get the number of customers and subsequently revenue to hit your profit target. Make sense?!
The bottom-up forecasting approach
This is a more tactical approach to determine the results of your marketing and campaign efforts. It can be a bit more complex, as there are more inputs, which means you need to put a bit more thought into it. But nothing worthwhile ever came easy, right?! And the output of this type of model is very worthwhile.
A typical bottom-up model forecasts monthly results for multiple marketing channels or tactics. It might look something like this:
- Facebook ads
- X budget & x CPC -> y site visits
- x conversion rate -> y sales
- x blogs
- x visits per blog -> y site visits
- x conversion rate -> y sales
- Organic Social
- x posts
- x clicks per post -> y site visits
- x conversion rate -> y sales
In this model, you quantify the impact of your various marketing tactics. You start with how much of something you’re going to do (how many social posts or blogs will you create, how much will you spend on paid ads, etc.). Then you determine how much traffic each tactic will drive to your site. Each tactic will convert at different rates, so you will likely have different conversion rate inputs for each. The more detailed you are with your inputs, the more accurate your outcomes will be.
Then you add up the sales outcomes from each tactic or channel, and you have your total sales forecast.
When should you use a top-down vs bottom-up sales forecast?
Because it’s always easier to understand with a real-life practical example….
Think about it like saving up for a big purchase – let’s say a down-payment on a house.
You could use a top-down approach to determine your savings goal and how much you need to save each month.
Then you could use a bottom-up approach to determine all the areas you need to cut your monthly spending to get you into that dream home (goodbye weekly Starbucks and Nordstrom visits – *insert cry emoji*. OR, you could input all the extra money you’re going to make in your business, from building a kick-ass business forecast… just saying!
Now back to business speak…
Here’s how we recommend using a top-down and bottom-up forecasting model together
A top-down model is used to project your bigger target to hit your goals – i.e. how much money you want to put in the bank. Then you use a bottom-up forecast to see if you are doing the right things from a tactical standpoint to achieve your desired profit target.
Long story short, using them together will help you set your targets and understand what you need to do to achieve them.
Now, if you want to give this business forecasting thing a go but aren’t spreadsheet-obsessed like we are, we have the product for you.
Introducing the BUSINESS FORECASTING TEMPLATE!
We’ve taken care of the boring stuff like calculations and formatting. All you need to do is enter your business inputs. We’ve even provided some industry standards for inputs, just in case you don’t know your own.
Take control of your business, and keep yourself accountable by setting your annual profits goals and monthly targets. We are confident this breakdown will help you understand how much success is in reach and what you need to do to achieve your goals!
The future is waiting!
3 Reasons why forecasting is important for a business
1. It helps you plan for the future & reach your goals
Your business is more than a hobby. Whether you are looking to grow your business, create passive income, or start a side-hustle – you owe it to yourself to take it seriously and put your best foot forward.
A simple business forecast can help you plan your long-term goals and milestones, and create a short-term tactical plan with measurable targets to understand exactly what you need to do to acheive your goals.
2. Spend your marketing budget wisely and ensure your marketing tactics have a positive ROI
What are two things we could all use more of? Money and time, am I right?! So instead of guessing and gambling your money, forecasting will help you find the most valuable places to invest your time and money. You’ll know which marketing tactics to use to ensure you are working towards your goal.
Speaking of tactics, if you’re unsure which ones are best suited for your business, check out our FREE Menu of Marketing Tactics.
It gives the low down on Email, Social, Search, and Display tactics at your fingertips and gives tips on when to use each.
Business forecasting will also help with revenue vs. earnings by subtracting expenses, interest, and taxes from revenue. As a business owner, you need to know your numbers, because when they don’t add up, it can be scary!
3. Track your forecast vs actuals to measure your progress
Lastly, and our favorite reason, business forecasting helps you stay on track. When you have targets, you can compare your actual results vs what you planned to achieve in your forecast. Measuring your results is SO important. It really is the key to understanding your progress and why you are or are not hitting your targets.
Nerd alert: there is power in data; literally everything can be a learning opportunity. Even if you don’t hit your targets, figure out WHY, and course correct.
There are no failures, only lessons.
PS… if all the measurement stuff sounds like fun, and you’re looking to get in touch with your inner nerd, check out Know Your Numbers: Marketing Analytics 101.
Let’s break it down with some business forecasting examples
How much money can you make selling online courses? Let’s find out!
Here is an example from The Business Forecasting Template to show how you can set and achieve your annual goals based on the top-down approach:
So, if we want to make an annual profit of $150,000 as a course creator, it could be as easy as driving 1733 visits to our site per month. That assumes we have a 5% Conversion Rate, we have customers that purchase multiple products (1.3 purchases per customer), and on average, each customer spends $250. That takes us to $200K revenue, and with a 75% margin, we can hit our $150K goal.
Seems pretty achievable right?! Now let’s validate it with a bottom-up approach.
The below is a simplified example, where we’re simply setting monthly course sales targets based on our strategy and tactical plan. For the evergreen sales, we start with an average monthly sales number we anticipate, and then project an x% monthly growth rate. Then we layer in our seasonal / event-driven sales, which in the course creator example, are our live launches.
Now let’s take a second to look at our top-down approach against our bottom-up approach. We wanted to make $150K in profit. We set our monthly goals, which we believe are totally achievable, and it looks like we’ll actually be able to hit $278K in revenue. If we use the same 75% margin, we would make $208K profit – $58K more than our top-down approach.
The above comparison validates that our goals are reasonable, and in fact, we can actually far exceed our profit target!
This is the power of business forecasting.
Not only have we now validated our goals and desired profit, we now have monthly targets. We can measure our progress monthly and compare it to our monthly forecast to keep us on track and progressing towards our goals. And if things go off-track, we’ll be able to course-correct much quicker.
If you’re ready to get your business forecast in place, be sure to check out our Business Forecasting Template. We’ve done all the hard work for you… just enter your inputs, and you’re good to go!