9 financial forecasting tips for startups and small businesses

As a small business owner, nothing is certain. In a world where market shifts and technological advancements are the norms, having a strategy to anticipate the future is invaluable. That's where financial forecasting steps in. 

So, what is financial forecasting? It’s the art and science of predicting your business's financial future. By analyzing past trends and current data, financial forecasts help you get a glimpse of what's coming, enabling you to plan effectively and make strategic decisions. 

For those just starting to navigate these waters, understanding and applying financial forecasting can seem daunting. In this guide, we'll simplify it with nine practical tips — and uncover how expense management software can make the process more manageable and insightful for your business.

1. Define the purpose of your financial forecast 

Before diving into numbers and charts, it’s crucial to pinpoint why you’re forecasting in the first place. Are you preparing for expansion, anticipating funding needs, or strategizing for potential market changes? 

Clarifying the purpose of your forecast guides the focus of your analysis, ensuring it aligns with your specific business objectives. This clarity is not just about predicting your financial future; it’s about shaping it with intention.

2. Understand your revenue streams

Understanding where your income comes from is the cornerstone of drafting an effective financial forecast. Break down your revenue into different streams, whether it's product sales, services, or recurring subscriptions, so you can get a holistic view of how much money is coming in and where it’s coming from. Understanding these sources helps you identify trends and predict future income more accurately. 

3. Compile historical data 

A solid financial forecast is grounded in reality, and that reality comes from your business's past performance. Gather data like sales records, expense reports, and past financial statements.

Ideally, aim to gather at least three years' worth of data. This provides a comprehensive view, capturing not only seasonal variations but also long-term trends and anomalies. If your business is newer, compile as much data as you have available, even if it's just for a few quarters. 

Key pieces of data to consider include:

• Revenue

• Operating costs

• Profit margins 

• Losses 

• Liabilities 

• Investments 

• Fixed costs

This historical data serves as the foundation upon which your financial predictions are built, empowering you to gain insight into patterns and growth trajectories.

4. Incorporate technology 

Financial forecasts are a lot simpler when you’re not doing everything by hand. Expense management software can significantly enhance the accuracy and ease of creating a financial forecast by automating data collection and analysis and providing real-time insights — without the risk of error that comes with manual expense reporting. 

Shifting away from the manual approach speeds up the forecasting process, freeing you to focus more on strategy than on spreadsheets.

5. Choose a specific timeframe for your forecast

Deciding on a timeframe for your forecast — be it quarterly, annually, or something else that works for you — helps set the parameters for your predictions. This timeframe should reflect your business cycle and planning needs. 

For example, short-term forecasts can help with immediate budgeting and money management, while long-term forecasts are essential for strategic planning and investment decisions down the road.

6. Choose a method of financial forecasting

There are two methods of financial forecasting: qualitative and quantitative, which are defined below. 

• Qualitative forecasting relies on expert opinions and market trends, ideal for new businesses without much historical data. 

• Quantitative forecasting uses mathematical models and historical data, suitable for established businesses with ample data. 

Selecting the right method depends on your business’s age and goals, but if you’re just starting out, qualitative forecasting is generally the way to go. 

7. Incorporate realistic assumptions 

While dreaming big is an important part of running a business, your forecast should be rooted in realism. This means making educated guesses about future market conditions, growth rates, and potential challenges. 

Avoid overly optimistic (or pessimistic) projections. Realistic assumptions make your forecast a reliable tool for decision-making and planning.

Here are some tips to ensure your assumptions are on track:

• Compare with industry standards: Benchmark your projections against industry averages. If your growth rates are significantly higher without a clear competitive advantage, you might be too optimistic.

• Review past trends: Use your historical data as a reality check. If your forecasts deviate drastically from past patterns without justifiable reasons, they may be unrealistic.

• Consider best and worst-case scenarios: Plan for different outcomes. If your projections only work under ideal conditions, it’s too optimistic. Similarly, if it’s solely based on worst-case scenarios, it’s too pessimistic.

8. Closely monitor cash flow

Keeping a close eye on your cash flow — the movement of funds in and out of your business — is a must for predicting financial health and sustainability. This practice helps you foresee periods when you might need additional cash resources or when you can afford to make significant investments. 

By keeping a close eye on cash flow, you can anticipate challenges, plan for contingencies, and capitalize on opportunities without jeopardizing your operational stability. 

9. Seek professional advice

While developing a financial forecast is fundamentally a DIY task, seeking professional advice can significantly enhance its accuracy and reliability. Financial experts, like accountants or financial advisors, can provide valuable perspectives, especially when it comes to interpreting complex data and market trends. 

They can also help identify potential risks and opportunities that you might overlook. Involving a professional in your financial forecasting process adds a layer of expertise that can refine your strategies and ensure your forecasts align with both your immediate needs and long-term objectives.

4 types of financial forecasting 

Understanding different financial forecasting methods can help you choose the right one for your business's unique needs. Let’s explore four common types:

1. Sales forecasting 

Sales forecasting is about predicting what you expect to sell over a certain period of time. It's key for managing inventory, setting sales goals, and planning for growth. By analyzing past sales data and considering market trends, you can estimate future sales, helping you make informed decisions about resource allocation and strategy.

If your business has a strong sales component, this method can help you align inventory and staffing with expected sales, preventing both shortages and surpluses.

2. Cash flow forecasting 

This method focuses on predicting the flow of cash in and out of your business — which is a huge part of keeping your business up and running. It's particularly beneficial for businesses that have significant ebbs and flows in their cash positions. 

If you're often juggling incoming revenues with outgoing expenses, cash flow forecasting can help you plan for slow periods and ensure you always have enough funds to cover your obligations.

3. Budget forecasting 

Budget forecasting is about anticipating future expenses and revenues to keep spending on track — ideal for maintaining financial discipline and preventing overspending. Budget forecasting helps set financial targets and limits, ensuring that your business spends within its means and stays on track toward its financial goals.

This method suits businesses that need to tightly control their finances, ensuring that spending aligns with strategic goals and revenue expectations.

4. Income forecasting

Income forecasting is used to predict profitability by estimating future revenues and subtracting anticipated expenses. It offers a clear view of your potential earnings, guiding pricing, cost management, and expansion decisions. 

If your business is focused on maximizing profits or needs to understand its profitability potential, this method can provide the insights you need.

Why is financial forecasting important?

Financial forecasting is more than just a number-crunching exercise; it's a vital tool for any small business. Here's what it brings to the table:

• Informed decision-making: Forecasts provide a roadmap of your financial future, allowing you to make decisions based on anticipated financial outcomes rather than guesswork.

• Budget management: By predicting future income and expenses, you can create a more effective budget, ensuring you spend within your means and allocate resources wisely.

• Risk management: Financial forecasts help you identify potential financial risks before they become problems, allowing you to take proactive measures.

• Funding and investment: For businesses seeking investment or loans, a robust financial forecast can demonstrate your business's potential to investors and lenders.

• Strategic planning: Forecasts allow you to set realistic goals and develop strategies aligned with your business’s financial capabilities and market trends.

In essence, financial forecasts give you the knowledge you need to steer your business toward growth and stability, making it an indispensable part of business planning.

Expensify takes the fuss out of forecasting

While no one can predict the future, financial forecasts come close — and they can get even closer with the help of the right tools. 

With automated expense tracking, easy access to historical data, and realtime analytics, Expensify makes financial forecasting a breeze. Sign up today to take the stress out of financial planning.