As a busy small business owner, your days are jam-packed. It’s natural to focus on what needs your attention right now.
However, planning ahead is just as critical to your SMB’s success. That’s where financial forecasting helps.
Think of financial forecasting like checking the weather or your gas gauge before a road trip. Forecasting gives you a sense of what’s on the horizon so you can better prepare, make more strategic decisions along the way, and even course-correct if necessary.
In this guide, we’ll walk you through the basics of small business financial forecasting, including how it can support your small business goals.
We’ll also show you how flexible funding options like revenue-based financing can work hand in hand with your forecasts to fuel your business growth.
What Is Financial Forecasting?
In essence, small business financial forecasting is about using historical data, market trends, and expert business insights to make informed decisions about your SMB’s financial future.
As an SMB owner, you’re already pulled in a million directions, so you may be wondering if the effort is really worth adding to your already-full plate. The short answer is: absolutely.
That’s because financial forecasting can actually help lighten your load. Moreover, it can help solve many common SMB challenges:
- Cash flow struggles: More than half of SMBs struggle with uneven cash flow and paying operating expenses. Financial forecasting helps business owners anticipate cash shortages, as well as surpluses, enabling them to plan accordingly and remain operationally stable.
- Rising debt: Close to 40% of SMBs carry over $100,000 in debt. Through forecasting, SMB owners can create their own tools and contingency plans to better manage their liabilities, avoid overextension, and minimize financial losses during unexpected industry shifts.
- Falling revenues: In 2024, for the first time in several years, more small businesses reported revenue declines than increases. Committing to regular review of financial forecasts can help SMBs track business activity and be more proactive—for example, adjusting strategies to meet their shorter- and longer-term financial goals.
- Difficulty securing funding: With almost two-thirds of firms recently seeking financing for operating expenses and growth, access to capital is a common challenge for SMBs. Having a clear financial forecast can demonstrate a business’s repayment ability, improving the odds of securing funding on favorable terms.
Ultimately, financial forecasting can turn uncertainty into all kinds of opportunities for your small business.
And even better? You don’t need to be a math wizard or CFO to do it. All you need are basic numbers and a bit of awareness.
Financial Forecasting Methods
In the world of small business financial forecasting, there are two main ways of going about it: quantitatively and qualitatively.
Each method has its own strengths and aligns to different business situations. However, understanding and even using both can help you forecast more effectively.
Quantitative Forecasting
In a nutshell, quantitative forecasting is all about numbers.
More specifically, it involves looking at data like your SMB’s previous sales figures, revenue trends and inventory levels to predict your future financial performance.
Common examples of quantitative forecasting include:
- Regression analysis: Examining the impact of one factor on another.
- Example: A local delivery company tracks how digital advertising affects new client sign-ups. They find that, for every $500 they spend on ads, they get 15 new customers. This helps them predict growth, optimize their marketing budgets, and scale operations more efficiently.
- Historical data analysis: Taking a broad look at past data (like sales and expenses) to identify patterns and predict financial trends.
- Example: A sports store reviews three years of historical sales data, seeing a 25-35% revenue spike every December. Leading up to the holiday season, they increase inventory and hire seasonal staff, ensuring they can meet demand without understocking or understaffing.
- Time series analysis: Anticipating future trends by analyzing specific data points collected over time.
- Example: A small B&B reviews five years of monthly booking data and discovers consistent peaks in spring and fall. With time series analysis, they can forecast demand, adjust staffing levels, and plan cash flow to manage both busy seasons and slower months.
The main benefit of this type of forecasting is that numbers are objective, making it easier to spot trends and patterns.
However, one limitation is that quantitative forecasting assumes past trends will continue. It doesn’t take the potential of sudden market shifts or unexpected disruptions into account.
If your business is well established, you likely already have the data you need for quantitative forecasting. Newer SMBs, however, may lack historical records. That said, over time, it’s easy to build a strong data foundation to support forecasting efforts.
Qualitative Forecasting
Where quantitative forecasting is numbers-based, qualitative forecasting is based on things like expert opinions, market research, and intuition.
Here are a few ways SMBs may apply this type of forecasting:
- Market research: Gathering customer opinions and industry insights through surveys, interviews, or focus groups.
- Example: A small accounting firm looking to expand surveys local business owners and finds strong demand for cash flow consulting. Based on these insights, they adjust their services, reducing the risk of shifting strategy without clear market validation.
- Delphi method: Collecting anonymous input from experts in multiple rounds to reach a consensus forecast.
- Example: A wellness spa consults health experts anonymously over several rounds to identify the latest stress relief trends. They reach consensus on rising demand for sound therapy, which guides the spa’s service development and marketing strategy.
- Scenario planning: Creating different future scenarios and planning responses for each possibility.
- Example: A residential contractor looks at three possible housing trends in their area: steady demand for new builds, a market slowdown, or more homeowners choosing renovations instead. For each scenario, they adjust the type of jobs they will take on, how they’ll promote their services, and how they will manage cash flow. This helps them stay flexible while maintaining steady work.
Qualitative is more flexible than quantitative forecasting, as it allows businesses to adapt more readily to unexpected change.
However, it can also be less precise, given that human biases can influence your predictions.
This method works especially well for newer businesses or those in uncertain markets, where historical data is limited or irrelevant.
Thinking of trying both methods? Many SMBs like to blend qualitative insights with quantitative data. This can lead to more well-rounded, balanced predictions, capturing context beyond mere numbers.
Forecasting Financial Statements
Now that you know some of the most popular ways to figure out where your business is heading, let’s cover the three practical tools to build, organize and document your SMB’s financial forecasts.
Income Statement (Profit & Loss Statement)
An income statement lists your revenue, costs of goods sold (COGS), and expenses over a specific length of time, to show whether your business experienced a profit or loss.
When you understand these numbers and review them frequently, you can use those insights to boost your budgeting and financial forecasting.
Historical income statements help you notice things like seasonal revenue shifts or rising expenses—forming the basis for predicting future income, costs, and profitability.
You can also refer to your income statement to spot early warning signs before they turn into full-blown red flags for your business.
For example, you may notice supply costs are steadily rising at the same time your profits are slipping. If you review your statement monthly, you can catch that trend early and adjust pricing before the issue affects your cash flow.
Cash Flow Statement
Your cash flow statement tracks all the money moving into and out of your business, including sales, loan repayments, investments, and everyday expenses.
While an income statement shows profitability, a cash flow statement shows whether your business has enough liquid cash to cover its day-to-day operations, bills, and short-term obligations.
By visiting it regularly, your cash flow statement can help you forecast potential cash dips and surpluses. This enables you to plan accordingly, whether you need to do some cost-cutting or plan for growth.
As an example, you might review your statement every month to ensure you have enough cash on hand to pay employees and handle unexpected expenses. Without this visibility, your operations could stall or face a cash shortage, even if your business shows a profit on paper.
Balance Sheet
The balance sheet provides a snapshot of your business’s financial position at a specific time—listing your assets, liabilities, and equity, and tracking what your business owns versus what it owes.
This information supports better decision-making and financial forecasting by predicting whether you will have enough resources to cover debts and invest in growth opportunities.
For instance, if you were to check your balance sheet every month, you might notice rising debts or unpaid bills. These changes could signal upcoming cash flow problems.
Catching these signs early lets you adjust your spending, renegotiate debt, or secure additional financing before these issues disrupt your day-to-day operations.
With consistent forecasting using these three essential financial statements, you’ll have more control and clarity for making strategic decisions, attracting funding, and growing your business sustainably.
Financial Forecasting for Growth Planning
Thinking of expanding your small business?
Whether you have dreams to hire new employees, introduce new offerings, or enter new markets, growth planning is all about setting clear goals and understanding the resources you’ll need to achieve them.
Financial forecasting supports growth planning by helping you:
- Plan for increased costs: Growth doesn’t come for free. But by forecasting new expenses like additional payroll, equipment, or digital marketing, you can avoid cash flow disruptions and budget for the future much more effectively.
- Evaluate funding opportunities: When you have a clear picture of your future revenues and expenses, it’s much easier to pinpoint when, and even if, you might need to seek extra capital to grow. This helps ensure you avoid taking on debt or giving up equity unnecessarily.
- Set measurable milestones: Tracking your actual performance against your forecasts will help you see whether you’re hitting your goals. If you’re missing certain targets, you can course-correct early on.
Ultimately, forecasting is a great way for SMB owners to transform their growth dreams into actionable steps—opening up a more sustainable and strategic path to scaling.
How Revenue-Based Financing Supports Forecasting & Growth
Kickstarting and sustaining business growth often requires some kind of funding.
Traditional bank loans are one option.
However, loans can be hard for SMBs to access due to rigid eligibility requirements and lengthy approval processes. Not to mention, they come with fixed monthly payments that can strain cash flow during slower periods.
Thankfully, revenue-based financing (RBF) offers a flexible alternative to help small businesses overcome these challenges.
Where banks usually want high credit scores and a ton of paperwork, RBF has much more flexible terms, making it easier for SMBs to qualify.
With RBF, you receive an upfront lump sum in exchange for a percentage of your sales each month. No fixed payments are involved, because your monthly repayment amounts go up and down with how your business is doing.
This type of funding perfectly complements small business financial forecasting because it:
- Lines up repayments with your revenue, easing financial stress even if your sales dip.
- Syncs with your cash flow projections and sales cycles, enabling simpler budgeting.
- Makes your financial predictions more accurate, as well as more adaptable, by reflecting true business performance.
Ultimately, including revenue-based funding in your financial forecasts makes it easier to plan ahead and stay steady. As a result, you can confidently invest in new growth opportunities without worrying about fixed payments holding your SMB back.
Looking Ahead? Bitty Fuels the Future for SMBs
Congratulations! You now know the right strategies and tools to drive the future of your small business with greater intention and clarity.
Granted, no forecast can predict the road ahead with 100% certainty.
But small business financial forecasting will absolutely give you the insights and agility to propel your SMB forward, no matter what’s around the corner.
Meanwhile, when paired with flexible funding options like Bitty’s revenue-based financing, your forecasts become more than just numbers on a page—transforming into a launchpad for resilience and long-term success.Curious how RBF can amplify your plans and support your SMB’s next bold step? Contact Bitty today—and let’s explore what’s truly possible for your business.
