What would you say if someone asked, “Where do you see your home improvement or remodeling business in the next two years?” As an entrepreneur, you’d likely answer that question with a lot of optimism. And it’s great to be positively confident in business. But exactly how real are your expectations?
You can ground your business expectations in reality through business forecasting. In a nutshell, business forecasting is making predictions about key metrics, like future sales, profits, and growth.
But there’s more to business forecasting than just guesswork. Much goes into business forecasts, including educated estimates and hard facts. You want accurate forecasts to inform important decisions for your home contracting business.
Business forecasting tells you more than where the business is headed. It can help you decide when to hire more workers or get financing. Forecasting can tell you when to purchase certain assets and how to market your services. It’s an invaluable practice for anticipating future challenges and opportunities.
The question now is, what exactly is business forecasting, and how is it done?
This article is a complete guide on how to forecast your business. Read on to learn how to improve your business performance with accurate forecasting.
Understanding Business Forecasting
Have you ever wondered how big companies come up with such bold financial, sales, and growth projections? Well, it all comes down to business forecasting. And it’s not just for startups or giant brands. Your home improvement or remodeling business can make realistic forecasts, too.
But before we get to how to forecast your business, let’s get the basics out of the way.
What Is Business Forecasting?
Business forecasting is essentially making predictions about various aspects of your business. It usually involves projecting key performance indicators (KPIs) of business success. KPIs for a remodeling or home improvement company may include:
- The volume of contracting jobs
- Total sales for a given period
- Revenue and cash flow
- Number of employees
- Geographical influence or reach
- Market dominance
- Demand for home improvement or remodeling services
- Profitability
- Operational efficiency
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There are generally two ways to forecast a business:
1. Qualitative forecasting
Qualitative business forecasting relies mainly on your entrepreneurial intuition, expertise, and experience. For instance, you can have a hunch about a specific outcome or future events, such as market/demand shifts.
Being an industry veteran can give you a sort of sixth sense. You can understand concepts and their connections in ways that can’t be put on paper.
Qualitative forecasting also involves drawing meaningful predictions from expert opinions (the Delphi method).
This method of business forecasting is also called judgment or expert-driven forecasting. And it works, though, usually on short-term scales. Also, it’s prone to obvious biases such as optimism and wishful thinking.
2. Quantitative forecasting
This is more of a data-driven approach to business forecasting. It aims to eliminate the human element out of business predictions. Instead, quantitative forecasting involves analyzing historical data, solid expectations, and known industry patterns.
This business forecasting technique relies on analytical methods such as:
- Time series forecasting. Also known as trend analysis, this method uses historical data to predict the future. It focuses on finding patterns in past events and extrapolating them into the future. This is the most popular form of business forecasting, favored for its simplicity.
- The indicator approach. Forecasting based on the connections or relationships between certain events. For example, housing market growth usually corresponds with increased home improvement services demand.
- Model-based forecasting. Modeled business predictions are a bit more complex. They involve sophisticated mathematical calculations and vast volumes of data. The most common model-based forecasting method is econometric modeling. It uses statistical equations to plot financial, demand, and pricing forecasts. Usually, this is done using specialized digital tools.
The Role of Forecasting in Business Planning
Forecasting is integral to strategic business planning. Business planning means developing your company’s mission and goals. Then, you define the strategies for achieving those ambitions.
Accurate forecasts help you plan your home improvement business in two crucial ways.
One, business forecasting helps you set measurable long-term and short-term goals. Having goals puts a target in your sights. It also enables you to adapt business processes and operations to stay on the desired path. Goals also define what counts as business success.
Two, forecasting helps you anticipate changes in the market. Market research highlights patterns that can predict industry trends and customer behavior/needs. By anticipating market changes, you can adjust logistics, pricing, and strategies as needed.
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For instance, you might have noticed a growing trend in green residential buildings. More people are building or remodeling homes with sustainability and eco-friendliness in mind. If market analysis shows increased demand for green buildings in your service area, you can adjust to meet this demand.
In such a case, you could model your business to take full advantage of the trend. And the earlier you can do so, the further you’ll be ahead of competitors.
Why Forecasting Is Crucial for Home Improvement Contractors
Forecasting enables you to make informed business decisions. It’s also an excellent tool for averting imminent risks and identifying future business opportunities.
But what exactly can forecasting do for your remodeling or home improvement business? Quite a lot. Here are four areas where forecasting comes in handy:
Managing Seasonal Demand
The home improvement industry can be erratic. Job availability depends on many external factors. These include the financial market, popular trends, the housing market, and economic stability. Likewise, demand for home improvement and renovation services often fluctuates in ways you can’t control.
However, demand forecasting enables you to anticipate seasonal changes. And more importantly, prepare for the ups and downs.
For instance, you can stock up on building supplies and labor in preparation for peak season. As the low season approaches, you can downsize your workforce or pivot to other in-demand services.
Resource Allocation and Management
Accurate forecasts make your business more efficient in terms of resource utilization. You can use the available resources better by anticipating specific challenges or opportunities.
Business forecasting will tell you the best time to buy building materials. It can tell you how to manage your crew and allocate projects. It can also identify what equipment/machinery you should have at any given time.
Efficient resource allocation minimizes expensive redundancies or deficiencies in your business. It’s about having precisely what you need when you need it.
Financial Planning and Cash Flow Management
Your financial management style can make or break your business. This is undoubtedly the Achilles’ heel of small and medium-sized enterprises. Analysts say 82% of small businesses fail due to cash flow problems.
If you want your business to thrive, you must get the numbers right. And a big part of that is anticipating and planning expenses and revenue using financial forecasting. This involves estimating future sales and budgeting for upcoming projects. Additionally, it includes directing funds toward business growth.
Competitive Advantage
The home improvement space is a highly competitive niche. One way to outcompete other contractors is by seizing new opportunities and overcoming market challenges before everyone else. Business forecasting lets you do just that.
Predicting future business opportunities and market shifts improves your speed to market. Preparing for foreseeable challenges means you can deliver high-quality services at competitive prices. Forecasting sharpens your competitive edge by making your business more agile.
Approaches to Business Forecasting
All business forecasting techniques fall into two general approaches: top-down and bottom-up forecasting. Let’s look at how either approach works and its pros and cons.
Top-Down Forecasting
Top-down forecasting is a method of predicting future business performance by first assessing the market size and working down to revenue.
To forecast your future revenue growth, you’ll start by outlining your business’s total addressable market (TAM). Your TAM will probably cover all homeowners and prospective homeowners within your service area. You’ll then factor in the market share your business will have acquired within the forecasted period.
Say the TAM is worth $50 million, and your market share is 20%. Then, the maximum revenue you can expect will be $10 million ($50,000,000 X 20%). You might want to factor in other financial metrics such as desired project size, average price per project, and so on.
This approach takes a “global” approach to creating performance and financial forecasts. For that reason, it’s only practical for large-scale home improvement projects.
The Pros
- Quick and easy to execute
- Requires little to no historical data
- Provides a high-level sense of what is possible in the market
- Offers a positive outlook
The Cons
- Quick and easy to execute
- Requires little to no historical data
- Provides a high-level sense of what is possible in the market
- Offers a positive outlook
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Bottom-Up Forecasting
Bottom-up forecasting analyzes the individual micro-level inputs or performance drivers. From this, it builds a predictive model. It estimates how specific performance metrics impact revenue. The performance metrics start at the ground level and may include the following:
- Marketing conversion rates
- Revenue per conversion
- Customer lifetime value
- Service delivery costs
- Crew productivity
This forecasting style takes a more detailed approach to projecting sales and revenue. That’s why it’s suitable for custom home improvement and remodeling projects.
The Pros
- Provides more realistic forecasts
- Highlights internal factors that might impede or promote sales, revenue, or growth
- Creates room for strategic business planning
- Involves internal collaboration to get the complete picture
The Cons
- Requires measurable data, particularly the business’s past performance
- It is a more involved and sophisticated business forecasting process
- The most minor mistakes at the micro level can get dangerously amplified at the macro level
Rather than choosing one approach over the other, it’s better to combine both. Each style has strengths that complement the weaknesses of the other. The top-down projections will set an upper limit for the bottom-up quotas. The bottom-up approach will highlight the operational requirements needed to hit top-down figures.
Implementing Forecasting in Your Business
So, how do you forecast your home improvement or remodeling business?
Business forecasting is both a science and an art. There’s no perfect way to go about creating a business forecast. However, here’s a checklist of the fundamental business forecasting processes:
Gathering the Right Data
The first step when forecasting business performance is gathering data. This is the most important step in all business forecasting methods. The more insight and data you have to work with, the more accurate your business forecasts.
These are the most relevant data sets for forecasting your business:
- Market trends. Gather data about your market’s dynamics. Market trends revolve around customer preferences, needs, purchasing habits, and spending power.
- Past projects. Analyze your past projects to see what your average home improvement project looks like. Determine the size, cost, and income of your average project.
- Internal sales data. What do the numbers say? Assess your job volume and generated revenue across various periods. Know, for instance, your monthly sales and sales growth. This is essential for sales forecasting.
- Marketing performance. The performance of your marketing efforts can give you an idea of the sales figures to expect within a given period.
- Customer feedback. Customer satisfaction is a good indicator of progress and future leads. You should get this information from your customer relationship management (CRM) system.
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Forecasting Tools and Techniques
It would be best if you used both qualitative and quantitative techniques to forecast your home improvement business. And you don’t need much to get started, either. Besides data, you’ll only need your trusty calculator and spreadsheet.
However, the days of manually crunching numbers are long gone. To get the most detailed and accurate projections, you’ll need powerful digital tools. This is especially true if you’re working with complex mathematical models or lots of data.
There’s a wide selection of premium forecasting tools. Here’s a list of some of the best choices for home improvement and remodeling contractors:
Regular Review and Adjustment
Business forecasts are not set in stone. Both external and internal forces can push the actual business outcomes away from valid projections. Unexpected changes in the market or supply chain issues can nullify your projections.
So, it would be best to keep fine-tuning your forecasts to align with the prevailing business atmosphere. Make a habit of reviewing your business forecasts monthly or quarterly. Also, review after any significant changes in the industry, market, or business.
Conclusion
Business forecasting is like looking through a crystal ball. Demand, supply, cash flow, and sales forecasts are essentially glimpses into your business’s future. If done correctly and with quality data, you can trust these projections.
To recap, this is what accurate forecasting can do for your home improvement or remodeling business:
- It gives you better visibility into your business performance
- Enables you to draft strategic business plans to meet future challenges and opportunities
- It helps your business utilize its resources (crew, supplies, cash, time, etc.) more efficiently and productively
- Puts you ahead of competitors
- Improves your business’s agility and adaptability
- Enriches your decision-making with reliable insights and information
- Boosts business growth by setting targets and defining strategies to hit those targets
Clearly, there’s no reason you shouldn’t integrate forecasting into your business practices. A solid business forecast could easily be the difference between success and failure or growth and decline.