How well do you forecast in business?


Forecasting helps your business be ready for what lies ahead.

by Chia-Li Chien | Mar. 18, 2014

How well do you forecast in business by Chia-Li Chien"Three-million good ideas each year in North America get shot down. At best, 1% make it." This is according to Professor John P. Kotter in his book Buy-In: Saving Your Good idea from Getting Shot Down. Obviously, it takes more than good ideas in products, services, process improvements, etc. for success. Even Steve Jobs, one of the founders of Apple was fired by Apple’s first CEO and Board of Directors despite of ahead-of-his-time ideas, according to The Steve Jobs Way: iLeadership for a New Generation by Jay Elliot with William L. Simon.

In the business world, public or private sectors tend to take ideas and run a forecast just to see how they stack up financially. I want to focus in this article on what and why to forecast and then talk about how to forecast in a follow-up article.

What is Forecasting?


Let’s take a look at the definition from Merriam-Webster dictionary:



fore•cast
verb \-ˌkast; fȯr-ˈkast\

: to say that (something) will happen in the future : to predict (something, such as weather) after looking at the information that is available

Every morning, I check the weather forecast to prepare for my day. Why? If it’s going to rain, I might need an extra ten minutes to get to the office on time. I might remind my daughter to put on an extra layer or jacket in case of windy or snowy conditions. The weather forecast helps us prepare for our day ahead. Before the business fiscal/calendar year ends, most businesses will prepare a budget for the upcoming year, so that people know the target and how they will be measured and rewarded.

Forecasting is nothing more than a tool to help us prepare for what’s ahead so we can be more proactive in achieving our business goals, instead of reactively putting out fires. I would venture to say that you and I both know that the weatherman/woman may or may not be right about the weather forecast. With the latest technology improvement, I would say that their forecast is very close but still not 100% accurate. We factor that weather accuracy of the forecast into our day’s preparation and schedule as well. Your business forecast must allow for an expected accuracy range, too, so people can stay focused. 

The difference between budget and forecast.

 

 

Budget

Forecast

What are the intentions?

Where do you want to go? i.e. 15% increase in revenue by Dec. 2014

Where are we now? i.e. 5% ahead of the plan and on track to achieve the goal. It’s like a radar or GPS to show your current state.

When to prepare the number?

Once a year, typically year-end, prior to the upcoming year. i.e. Dec. 2013 for 2014 Budget

As often as needed. It depends on types of forecast, for example, 13-week cash flow forecast, daily credit forecast, 8-week sales forecast, quarterly people capacity forecast, etc.

 

What do businesses typically forecast? The Triple Bottom Line, according to my favorite author Ken Blanchard in his book, Leading at a Higher Level, Blanchard on Leadership and Creating High Performing Organizations.

Here is how the triple bottom line stacks up with forecast examples and common failures in business.

 

Employees

Customers

Investors

The best place to work

The best place to do business with

The best place to invest

Forecast Examples

· People Capacity

· Performance

· Production Output or efficacies

· Sales

· Marketing

· Sales Channels

· Credit

· Products

· Profits

· Cash Flow

· ROI, Payback

Common Failures in Business

Wrong people on the team

Lack of market share and profits per customer

Consistently not meeting the ROI or business performance expectation

 

Every year, Forbes publishes the Top 100 Best Places to Work. The Business Journal publishes local top business rankings. Online, you can readily see stock market ranking complete with the buying and selling of public traded companies. This information is all around you regardless of your industry.

Paul is in charge of hitting the right monthly sales forecast per his owners’ projection of the year. The sales forecast drives the amount of the raw materials Paul’s company has to purchase, the products to make and to ship to the customers—on time and accurately. Paul has often forecasted in the dark since he does not know his customers’ annual budgets nor how the industry trend is changing with the use of his products. As much as Paul actively re-forecasts on a regular basis, the actual is always skewed due to the factors above.

On top of all those factors, this year’s snow storms in the northeast have resulted in shipping cost rising three times more than average due to the nature of the products, which require a heated truck and is much more expensive. There is also a shortage of availability of these trucks, making it tough for Paul to match his numbers.

The important part of the forecast is know your number—in other words, what a set of numbers means to you and your business. In Pauls’ case, his sales forecast includes net profit, cost of goods sold, product supply and demand, and more.

Every number means something in your business. What are some of the number sets you use in your business? Please call us at 704-268-9378704-268-9378 or email me at jolly@chialichien.com to share your insights on forecasting or to ask questions about how to make your forecasting more effective and meaningful in your business.

It’s not just the numbers in your forecast. You must consider both qualitative and quantitative data for the forecast. Stay tuned for the continuation of this article when we discuss forecasting and leveraging both qualitative and quantitative data.

 

About Chia-Li Chien

Chia-Li Chien

Chia-Li Chien, CFP®, CRPC, PMP; Chia-Li “like JOLLY,” Succession Strategist of Value Growth Institute, dedicated to helping private business owners increase their company equity value. She is the award-winning author of the books Show Me The Money and Work toward Reward and a faculty of the American Management Association. Her blog and newsletter was named a Top Small Business Resource by the New York Times You’re the Boss blog. Contact her at jolly@chialichien.com or (704) 268-9378 .

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