Operating expenses are basic and necessary elements of every business. Both expenses and revenues, as counterpoints in a company’s cash flow, must be managed carefully to achieve business success. As management consultant and author Peter Drucker noted, “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash Flow matters most.” One of the most essential responsibilities of management is to determine how to control and reduce operating expenses without negatively affecting an enterprise’s ability to operate and compete effectively. Smart business owners use operating expense forecasting to manage expenses and make better financial decisions more effectively. 

What Are Operating Expenses? 

Operating expenses are the day-to-day expenses required to run a business and generate revenue. Operating expense forecasting helps a company increase its earnings and gain a competitive advantage.

What is Operating Expense Forecasting? 

Operating expense forecasting is the process of using financial data and educated insight to help make educated decisions about a company’s financial future. It essentially requires making projections about company expenses based on past expense patterns, trends, and other relevant factors. 

Why is Operating Expense Forecasting Important? 

Operating expense forecasting is important because it helps businesses bring their budgets closer to actuals through variance analysis and can help reduce expense waste over time. It helps businesses make better decisions, including increasing staffing, seeking funding, and determining whether the company can undertake a capital project. It helps businesses plan for the future, including dealing with slow periods and anticipating new expenses. It helps businesses diagnose their operations, make course corrections, and embrace new opportunities. It helps businesses anticipate and react to market changes and uncertainties.

How to Do Operating Expense Forecasting 

There are seven methods for operating expense forecasting: 

  1. Percent of sales. Examine each line item of expenses as a percent of sales based on past financial statements. 
  2. Simple linear regression. This statistical technique is used to predict the relationship between two variables. 
  3. Multiple linear regression. This technique examines the relationship between multiple variables that influence expenses. 
  4. Straight-line method. This method assumes that a company’s historical expense growth rates will stay consistent. 
  5. Moving average. This technique uses the moving average of expense line items during previous periods to predict future expenses. 
  6. Market research. Business leaders use this method to get expense perspectives by examining competitive dynamics, consumer trends, and economic influences on expenses. 
  7. Delphi method. This method requires the use of consulting experts to help forecast a company’s performance and expenses.    

The steps to perform operating expense forecasting are as follows: first, define the purpose of your forecasting efforts. Second, identify your revenue streams and your expense categories. Third, assemble your historical financial data. Fourth, pick a timeframe for your analysis. Fifth, choose your forecasting method. Sixth, incorporate technology. Seventh, incorporate realistic assumptions. Eighth, run your analysis and evaluate your results.

Seek Expert Funding Assistance 

Contact Emerald Valley Financial Services, based in Eugene, Oregon, to get the funding your business needs. We provide a wide range of versatile funding solutions, including working capital, lines of credit, and equipment financing and leasing. We offer financial services for businesses of all sizes, including businesses that have been turned down by banks. We are here to help you succeed and grow!