How Business Forecasting Drives Better Decisions (Plus 5-Step Small Business Forecasting Guide)
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1. Start with a bottom-up revenue forecast2. Forecast expenses to guide spending3. Understand and manage cash flow4. Use business forecasts to test scenarios and make tradeoffs5. Review, revise, repeatFinal thought: A business forecast is a decision tool, not a crystal ball
As the CEO of a SaaS company, my time goes into running a business, and making decisions that shape our future: When should we hire? Can we afford that new tool? Should we scale our marketing budget this quarter?
These aren’t gut calls. They’re financial decisions. And the single most useful tool I’ve found for making them well is business forecasting.
When done right, forecasting doesn’t just show you where the business might go. It gives you a clear, data-informed framework to plan, adjust, and grow with confidence. It’s not about being exactly right — it’s about being better informed and using the forecast compared to actual results to gain insights and make decisions based on actual data.
Here’s how I use business forecasting to make better decisions in my SaaS business, and how you can too:
1. Start with a bottom-up revenue forecast
Skip the temptation to start with a giant market size and guess your slice of the pie. For SaaS, I build revenue projections from the ground up using metrics I can actually control and monitor:
- Previous 12 months of sales: Past sales data provides a realistic baseline that covers all of the seasonal trends over a year.
- Conversion Rates: Understanding how effectively leads or trials convert into paying customers is critical for projecting new customer acquisition and future revenue streams.
- Monthly churn: Knowing the rate at which customers churn, or stop subscribing, helps the team develop strategies to increase customer retention and monthly recurring revenue.
- ARPA (Average Revenue per Account): Tracking this shows the average value of each customer, helping model the impact of any promotions or pricing changes.
This bottom-up approach gives me a business forecast rooted in reality. It also helps me think through “what if” scenarios on pricing, onboarding, or sales efforts changes, and see how they affect the business in the future. The beauty of forecasting for a business is giving yourself a road map that you can follow, and that can guide you as obstacles or barriers present themselves.
2. Forecast expenses to guide spending
With a solid revenue forecast in place, I can now ask: What can I afford to spend — and where?
Forecasting expenses (payroll, tools, marketing, infrastructure) helps me make more confident spending decisions. If I want to add a headcount in Q2 or test a new paid ad channel, I model that impact ahead of time and weigh it against expected revenue growth and runway. This helps me avoid “decision whiplash,” where gut-feel spending like making a hire leads to panic cutbacks later when I realize I should have hunkered down with my savings.
With an expense forecast, I can make sure investments like hiring or advertising (which for many businesses could require a bank loan) line up with the financial trajectory of my business.
3. Understand and manage cash flow
In SaaS, cash flow looks different than in inventory-heavy businesses, but it’s just as important.
Annual contracts, delayed payments, and billing cycles can all create timing mismatches between revenue and cash in the bank. For any small business, not anticipating these mismatches can lead to unexpected cash crunches. It doesn’t matter if a business is successful — if it misses payroll just once, can’t pay a vendor on time, or misses a loan repayment, it’s in serious trouble.
Business forecasting helps me understand when and why those dips might happen, so I can plan instead of scrambling. Even with strong recurring revenue, if I’m not forecasting cash flow, I risk overextending during high-spend periods like a big hiring sprint or marketing push.
Free Download: Cash Flow Forecast Template
4. Use business forecasts to test scenarios and make tradeoffs
Should I spend $10k more per month on performance marketing or hire another engineer? Forecasting helps me run both scenarios side-by-side and see which is more sustainable, and what assumptions would need to hold true.
The process involves creating two separate ‘”what if” scenarios based on our main forecast:
1. Adding the $10k monthly marketing spend to our expense forecast, and modeling the assumed resulting increase in leads, conversions, and ultimately, revenue over the next 6-12 months based on expected ROI.
2. Adding the full cost of a new engineer (salary, benefits, tools) to the expense forecast. Then, modeling the assumed impact — maybe faster product development leading to reduced churn, or enabling a new feature launch sooner, which would translate into potential revenue growth or retention.
In both cases, we would carefully note the assumptions we used to create our projections. Maybe we would look at the ROI of previous marketing campaigns, divide revenue generated from the engineering team by the number of engineers to create the average value of an engineer, etc.
The more detailed the better, but these “what if” scenarios turn vague conversations into clear analyses of benefits and trade-offs when businesses make decisions about where to invest their resources.
5. Review, revise, repeat
The first version of a business forecast is never perfect. Neither is the second, or third, or tenth. That’s fine — it’s not supposed to be.
The real power comes when I compare the forecast to actuals monthly, understand what’s off, and revise the forecast. This regular review cycle helps us pinpoint exactly why things differed from the plan. Maybe a marketing channel underperformed? Or maybe churn was higher than expected? Once we review, we can adjust strategies faster and improve the accuracy of future forecasts. That’s how business forecasting becomes a real management tool and part of a business’s long-term strategic planning.
And over time, it builds internal discipline: our team starts making decisions aligned to realistic financial expectations, not just hopes.
Final thought: A business forecast is a decision tool, not a crystal ball
You’ll never be exactly right. But that’s not the point.
Business forecasting helps you ask better questions, spot risks earlier, and make faster, more confident decisions. In a SaaS business — where growth is a constant balancing act between revenue, expenses, and cash burn — that clarity is everything.
So build a business forecast. Keep it simple. Keep it updated. And most importantly: use it!
Sabrina Parsons
Sabrina has served as CEO of Palo Alto Software since 2007. She and her husband, Noah, founded a UK software distribution company in 2001 that was acquired by Palo Alto Software in 2002. Sabrina is a successful Internet expert, having served as Director of Online Marketing at Commtouch, Senior Producer at Epinions, and founder of her own Web consulting company, Lighting Out.
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