The worst is behind us. This statement is contingent on where you are in the world, but with the new vaccine announcements, it’s valid for most countries. All good news notwithstanding, the safe perspective to use right now is to see 2021 as 2020 without the element of surprise.
Get ready to review your assumptions as forecasting is conditional upon what you can see from this side of 2021. At least for the UK, January 2021 may change perspectives in either way. That does not mean you should not do it – if there was ever a time to try your hand at forecasting, this is it. Especially cash-wise.
Financial forecast is not the same as setting sales targets. What you put down on a spreadsheet as your forecast, which determines how much you can spend on your budgets and how your cashflow follows, is not the same as sales targets or sales efforts. Use this principle: assume low in your spreadsheet, target high in your sales effort and celebrate if proven wrong and good things come along.
Why should you forecast 2021 like a 2020 sans surprise?
The road to stability is built on cautiously detailed planning, anticipating some steps forward but also some steps backwards. Heck, if anything, that is what this virus taught us repeatedly, and we are bound to follow this pattern. Betting on the unknown and behaving as if things were going to spring up any moment does not help your stability. Stick to the known quantities, verified by reality, and make the most of them.
Avoid wishful thinking for now. Please come after me and tell me I was wrong. I will be thrilled for you. Until then, let us look at some methods for forecasting for 2021 that follows your existing trend and assumes it is going to stay bad before it gets better.
1 Client-based forecast
By far, the most reliable forecast is the one that starts with your client base. Who is likely to continue buying? As a rule, if you cannot identify a client by name, then it is unlikely that the sale is going to happen. Don’t rely on ‘new clients’ as a forecast, without knowing who those clients are likely to be.
Your forecast is only possible if you have some sort of pipeline and a lot of information about your clients. It does not matter whether it is a CRM or a simple excel spreadsheet, what counts is that you know where you are with your conversations with clients –past, current or prospective.
What to look for in your pipeline:
- Number of major accounts vs other clients – usually 80-20 rule applies
- Changes in volume purchased per client from 2019 to 2020
The above information will help determine how many major accounts you could have in 2021 (most likely the same as in 2020) and the average volume per client (possibly somewhere between the value of 2019 and 2020). See example below:
2 Mathematically deduced
In forecasting, math helps us identify the trend and take it into account in our assumptions. It is especially useful if your business is seasonal and determining a constant base for your monthly sales is difficult as it depends on which time of the year you are looking at.
Here are the steps:
- Calculate the moving average between months or quarters
- Calculate the mid-point between the moving averages
- Choose the lowest/most recent mid-point as your base
- Number your months/quarters
- Calculate the difference between your most recent mid-point and the first month/quarter
- Use the following formula: base + difference * number of month/quarter you forecast for
This will give you your next month/quarter forecast that takes into account the trend and flows it through into a cautious estimate of your revenue in the next year. Compare your result with your client-based forecast and decide on a pattern. If they are wildly different, you are under or over-estimating your client sales.
3 Mirror 2020
If you don’t have a pipeline or your client base is an unknown entity until the sale happens – for example, your service is a one-off that is not required again by the same client, therefore, you cannot identify clients right now – go for a forecast that mirrors 2020. We have examples of scenarios of mirroring below that you could use.
2021 as 2020 in inverse slope
Use this one as the basis for forecast and consequently, cashflow forecast, as cash may catch up with you at mid-year when the loan paybacks hit, and you want to be able to make it through to the second part of the year.
In the UK, specifically, it is fair to assume it is going to be bad before it improves, because of Brexit. The most we can hope for is that 1st January 2021 will not send an economic shock through supply chains and it is only the red tape that multiplies. If you are a business that depends on the EU market for in-bound or out-bound, nothing in this article applies to you.
Half-year down, half-year up
This is a risky scenario, but you can go for it provided you make sure that you re-forecast at mid-year based on actuals in the first half of the year.
Sources of data
To complete any type of forecast, you need to have reliable data in place. Here are the main sources:
- Sales analysis 2019 and 2020 – client names, with segmentation identifier (industry, size, other as useful for what you do), value, number of units sold (days, products, or projects and which), the average per unit
- Pipeline analysis – prospect names, with similar information as client base above with estimates
Additionally, you may want to monitor the source of your current clients in the above to identify where you put your money in your marketing in 2021. Whatever worked in 2020 is going to work in 2021, at least for the first half. You probably tried and tested a couple of different things during the lockdown, and after – some of it worked, some did not. Which one worked? The money will be scarce in the first part of 2021, and you want to be prepared to spend where it has an impact.
For a detailed explanation with practical examples of all the above, join us on Thursday 9th December at 10.00 am for a free online workshop. This is our last one of the series this year, and we are limiting the number of participants to 15 to ensure personalized approach and interactivity, so hurry up and register here: https://forecast2021forsmes.eventbrite.com
If December is too early for you, we will be doing a repeat on Friday 8th January at 10:00; tickets are available here: https://forecast2021forsmesjanuary.eventbrite.com.