Is Qualitative Financial Forecasting Relevant?
Written by Amanda Bower | Published: August 29, 2023
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The finance game is changing fast, and old-school forecasting methods won’t cut it anymore. New, fast-growing businesses may not have tons of historical data to make projections with. To really succeed, businesses need to get down with the power of qualitative forecasting.
This technique gets to the heart of subjective factors that other models can’t touch and helps you stay ahead of the curve when it comes to market trends and external influences affecting your bottom line.
Past data alone is no longer enough to predict your organization’s future. Qualitative forecasting is the unconventional yet effective tool that can help take your startup to the next level. If you’re ready to level up and prepare for the future, read on and get in the game.
What Exactly Is Qualitative Forecasting?
When it comes to forecasting, qualitative forecasting stands out from other methods. It involves using expert opinion and other non-quantifiable factors to predict a business’s financial performance and outcomes in the future.
Think of it like a secret weapon—it’s all about seeking the insights of experienced professionals and mentors, measuring consumer responses, or speaking with sales staff who can provide a pulse on customer sentiments.
Qualitative forecasting is perfect for when you need to make important decisions related to hiring and budgeting, especially when dealing with new markets. So, if you’re launching a new product and lacking historical data, don’t sweat it. With this method, you’ll still be able to make data-backed predictions.
Some of the benefits include:
- It incorporates subjective factors: Qualitative forecasting allows businesses to leverage factors that might be ignored by quantitative models (which we’ll touch on in a bit). This can include expert opinions, market knowledge, and industry information, which can paint a well-rounded prediction.
- It can anticipate market trends: Qualitative forecasting allows business leaders and decision-makers to determine how things such as changing customer tastes and preferences, use habits, technological advancements, and even regulatory changes will impact the future of a business.
- It supports strategic planning: The determinations made through this method can provide leaders with valuable insights which can help startups set lofty goals, formulate winning strategies, skillfully mitigate risks, and wisely allocate resources.
- It helps startups navigate risks: Startup life and risk go hand-in-hand, and startups can often face detrimental risks and uncertainties. But with qualitative forecasting, leaders can see risks before they arrive, anticipate them, and even take steps to avoid them.
At the end of the day, this method is all about using subjective factors to predict the future and gaining a more comprehensive understanding of potential financial outcomes beyond just numerical data.
When Is It Useful?
Financial forecasts are the bread and butter of any successful business. They help to set targets, strategize, allocate resources, and attract investors. Unfortunately, historical data is often nonexistent for startups, making accurate forecasts a challenge.
Why might startups lack adequate historical data? The truth is that many startups are just a handful of years old, and this time is crucial to the organization’s future. The average startup doesn’t even make it to its sixth birthday, and many startups that fail do so in their earliest years.
This means that startups trying to make accurate financial projections during this time typically only have a few years of historical data to leverage for forecasting. And the unfortunate reality is that this data might not be the most useful for accurately predicting a startup’s future.
Startups can often experience volatility and irregularity, and it can be challenging to determine what’s a random fluctuation, what’s seasonality, and what trends are being influenced by outside factors. If a startup is only in business for three years, and each year has been wildly different, this data can be tricky to accurately project with.
So, what’s a startup or other early-stage business to do? Give up on forecasting altogether?
That’s where qualitative forecasting comes in, giving businesses the edge they need to succeed. Startup leaders and decision-makers can still arrive at vital assessments, identify potential gaps or shortfalls, and get valuable insights into where their organization is heading, no matter how much historical data they have or the quality of it.
And when you have a reliable partner like Basis, preparing for any scenario is a breeze. They created pre-formatted worksheet templates tailored to every industry, allowing you to effortlessly generate budgets, financial models, and planning forecasts.
Industries That Use Qualitative Forecasting
Qualitative forecasting is common across certain industries, particularly rapidly evolving ones, and/or shaped by subjective factors. These can include:
- High-tech: In fast-moving spaces (such as high-tech), qualitative forecasting is often used to assess market trends, customer preferences, and competitive dynamics. It can help businesses understand the potential impact of innovative new ideas and make strategic ideas about new products and markets.
- Healthcare and pharmaceutical: Qualitative forecasting can be used to pinpoint trends in public health and which medications might be in higher demand. This can help determine things such as medication development and healthcare infrastructure.
- Tourism and hospitality: The hospitality and tourism space can use qualitative forecasting to determine upcoming travel patterns, and businesses in the space (such as hotels, resorts, and travel agencies) can make decisions about pricing, promotions, and service offerings.
- Entertainment and media: This forecasting method is often used in entertainment and media to predict audience preferences, consumption patterns, and preferred platforms. This data can then determine what content should be produced, how it should be distributed and marketed, and what technology should be invested in.
- Food and beverage: Consumer taste is a crucial factor in the food and beverage industry, which means qualitative forecasting can be the perfect predicting tool. It can be used to predict dietary trends and food preferences and help restaurants and manufacturers make decisions about menus, product development, and marketing strategies. Qualitative factors such as changing lifestyles, cultural influences, health trends, and culinary innovations can be considered in assessing future demand.
- Agriculture: Businesses in agriculture can use qualitative forecasting to predict future sales and determine which crops might be in high demand for the next season.
How Is It Different From Quantitative Forecasting?
Qualitative forecasting is just one forecasting technique, and there is another that is also quite common: quantitative forecasting. This is likely the “typical” financial forecasting you might think of, which involves using historical numerical data, statistical models, and plenty of math.
While qualitative forecasting is valuable, many quantitative corporate forecasting exercises can be useful for startups. Sales and cash flow forecasting are two examples, while forecasting techniques such as time series and scenario analysis can help predict potential financial outcomes.
3 Examples of Qualitative Forecasting
There are many different types of qualitative forecasting, including:
- Expert opinions: This common approach, also called the Delphi method, seeks input from industry experts with a wealth of experience in the field. These experts are asked specific questions, and their feedback is then collected and analyzed for trends or gaps. This feedback is then shared with the experts, and multiple rounds are conducted before a final report is written.
- Market research: This approach assesses how successful a startup will be in the future by showing its product or service to potential customers and analyzing their reactions. It can help identify trends, customer preferences and behaviors, and public perception and can be conducted through surveys, focus groups, interviews, and by analyzing industry reports.
- Sales force opinion: This method involves speaking with folks on the sales team because they work with customers individually and are often privy to vital information about their satisfaction level, sentiment, and overall experiences.
Qualitative Forecasting Is a Powerful Tool When Used Properly
Financial forecasting may seem daunting for startups as it often requires a significant amount of past data for accuracy. It’s not just about crunching numbers from the past—qualitative forecasting is where it’s at. It can give decision-makers valuable insights into their company’s future beyond just past numbers.
But for qualitative forecasting to work, it has to be done right. Not all qualitative data is equal, and if these methods aren’t executed correctly, you could have some wonky projections.
If you’re looking to master your forecasting to really understand where your company is heading, then we should talk. We provide startups with expert-led finance as a service (including bookkeeping services, finance, tax, and HR) and can help you navigate financial forecasting.
Contact us today to get started.
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