What are the best ways to use historical data for budgeting in small businesses?

1 Why use historical data?

Historical data can provide you with valuable insights into your business trends, patterns, and cycles. For example, you can use historical data to analyze your sales, expenses, cash flow, inventory, and profitability over different periods of time, such as months, quarters, or years. This can help you identify your peak and low seasons, your average and variable costs, your growth and decline rates, and your profit margins. By using historical data, you can also compare your actual performance with your previous goals and projections, and see where you need to adjust or improve.

2 How to collect and organize historical data?

To use historical data effectively, you need to have a reliable and consistent system for collecting and organizing it. Depending on the size and nature of your business, you may use different tools and methods, such as spreadsheets, accounting software, or cloud-based platforms. The key is to ensure that your data is accurate, complete, and up to date, and that you can access and analyze it easily. You should also have a clear and standardized way of categorizing and labeling your data, such as by date, product, service, customer, or location.

3 How to use historical data for forecasting?

Using historical data for budgeting can be very beneficial as it can help you forecast your future revenue and expenses more accurately. Forecasting involves estimating your expected income and outgoings based on past performance and current conditions. To make the most of historical data for forecasting, you need to take into account the length and frequency of your budget cycle, the type and level of detail of your budget, the sources and time frames that are relevant and reliable, as well as any adjustments or assumptions that you need to make due to your current situation and goals. For example, do you consider inflation, seasonal fluctuations, market changes, or new opportunities?

4 How to use historical data for benchmarking?

Using historical data for budgeting can also be done through the process of benchmarking. This involves comparing your performance to either your own standards or your competitors'. Doing so allows you to measure progress, recognize strengths and weaknesses, and set achievable goals and targets. To use historical data for benchmarking, you must first define the key performance indicators and metrics that reflect your budget objectives, such as revenue, expenses, profit, cash flow, or return on investment. You should then choose benchmarks and reference points to compare your performance with - this could be your previous budget, industry average, or top competitors. Collect and analyze your historical data and benchmarks to calculate the gaps and variances between them. Finally, evaluate and interpret the results to identify the causes and consequences of your performance.

5 How to avoid common mistakes when using historical data?

Using historical data for budgeting can be a great tool, but it’s important to be aware of potential mistakes and risks. Relying too heavily on the past without considering current and future trends can be detrimental, as can using inaccurate, incomplete, or outdated data. Additionally, it’s important to use relevant and appropriate data that matches your budget purpose and scope. However, if used correctly, historical data can help you improve your financial planning and management in your small business by forecasting, benchmarking, and monitoring performance. You can also use it to make smarter and more informed decisions about future spending and income.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?