THE BENEFITS OF FORECASTING

Over the years we have seen many businesses start up, evolve and go on to great things and we’re often asked what characteristics these success stories have in common. Some exploit a new concept, while others improve on something that already exists, but what else helps? We find that the vast majority of winning enterprises have a forward-looking strategy supported by a realistic business plan and a well-informed forecast.

Forecasting for new businesses is much more difficult than for established ones. It is usually fairly easy to identify costs with reasonable accuracy but sales are difficult, especially for new products or services. Market research can be invaluable. The more qualitative data that is gathered and turned into quantitative estimates, the more robust the forecast will be. Robust forecasts help business owners to generate investor interest or bank funding, plan for growth and to make business decisions such as when to recruit, where to invest time and energy and when to draw a line under something that’s just not working. In our experience, forecasts are seldom given enough attention. Poor forecasts, alongside overtrading and lack of sales are the most common causes of business failure. It is difficult for a business to reach its true potential if it is run on a crisis-management basis.

Like business plans, the real benefits only emerge when forecasts are continuously updated and refined. Accurate forecasts are the bedrock for predicting the future and taking action to prepare for it. As more data becomes available the forecast can be fine-tuned to continually improve its value in monitoring performance and identifying patterns. For example, being able to predict the number of customers at a restaurant for each service means the appropriate staffing can be organised, resulting in good customer service and efficient cost control.

The forecasting process should be collaborative and involve all the main teams in the business to ensure that everyone is heading in the same direction. Collaboration also helps avoid situations such as one I encountered recently, where the kitchen team were only able to fulfil 60% of the sales level predicted by the business owner. Forecasting is essential for good cash management. It’s surprising how often  a business has a healthy predicted profit and loss forecast but a very different picture emerges from the cash flow forecast. Understanding the drivers behind positive or negative cash flow is essential. A good forecast also considers different scenarios, such as sales being more or less than expected, so you can plan for them and focus on the key areas and keep them on track.

So, although prediction is difficult and the future uncertain, understanding how each part of your business is affected by different scenarios and involving the whole team in this process will put you in the best position to deal with whatever the future brings.

 

“We find that the vast majority of winning enterprises have a forward-looking strategy supported by a realistic business plan and a well-informed forecast”