Forecasting Made Simple

I'm tired of seeing crummy articles about building a budget, forecast, model, etc. so I decided to create this incredibly simple yet practical guide to budgeting. [In case you didn't pick it up, I use the terms budget, forecast, and model interchangeably.]

What are the steps?

You likely already know what a budget is – we're trying to predict our future revenue, expenses, profit, and cash flow over whatever time period desired (monthly, quarterly, yearly, etc.).

I'm building forecasts nearly daily, here's how I do it:

1) Prep work

• Grab your financials – ideally in excel, monthly format, going as far back as possible (I prefer a minimum of 18 months); longer timeframes give you better patterns or averages to improve forecast accuracy
• Have your general ledger available (or access to your financial software) – this shows you all the underlying transactions to find those unusual or non-recurring items; if the "office supplies" account has $10k one month vs. a normal monthly rate of $1k, then I'd want to know why
• Simplify – your financials are probably messier and more complex than they should be... whittle it down to a smaller number of line items... I suggest at most 4-5 groupings on your P&L (my preferred groups: sales & marketing, facilities, general & admin, and personnel)
• Setup your forecast template – here's a simple template to get you started​

2) Add the variables

• Start with the sales forecast – the 2 easiest approaches here: 1) use recent monthly averages; 2) use last year's monthly sales plus a growth or decline rate (i.e. if August 2023 sales were $20k and you expect to grow 5% this year, then August 2024 would be $21k)
• Apply a variable cost % to your monthly sales forecast – use your contribution margin to get a quick and easy read on COGS and gross profit; take an average of the last 6-18 months gross margin and use that to forecast
• Add monthly fixed expenses – start with the easy and known amounts like rent, utilities, salaried payroll, insurance, etc.; stick with averages or estimates for trickier items like repairs & maintenance, advertising, etc.

3) Tweak and adjust

• Make adjustments – adjust for seasonality, timing for large or one-time expenses, any non-recurring items
• Create scenarios – make 2-3 copies of your budget to get an upside, downside, and base case scenario for your business
• Use a summary view – use a condensed view when it's all done; it's hard to spot trends and patterns with all those numbers floating around
• Forget precision – we want to get in the ballpark with our forecasts; don't fret about being overly precise

Most owners need help getting started, so consider this a quick-start guide. We can always come back and refine our model with time (that's how we improve forecasting accuracy too).

These were my notes when fleshing out the concept behind this:

Homework – Get your hands dirty and attempt to forecast either: 1) sales and profit for the rest of 2024; or 2) sales and profit for the year 2025.

P.S. if you're a member of our online community, send me a note or share your work and I'll help you put it together!

P.P.S maybe this is worth a workshop or YouTube video tutorial... let me know by clicking here if this is something worth diving into!