.png)
.png?width=1200&name=forecasting%20101%20(2).png)
A financial forecast in business is a prediction of what’s going to happen. Not what you hope will happen, not what you fear will happen, but your best guess as to what’s likely to happen. While reviewing and analyzing company performance and financials is an important process in the business world, the past cannot be changed.
Forecasting is a tool that makes financial reporting a forward-focused, educational process where changes and adjustments can be made to influence the outcomes of the numbers. What does it take to properly forecast?
Here are three tips on making forecasting work in your business:
1. Focus on Key Variables
Each company has unique variables that measure their business, and there are two types of variables to keep in mind here: dependent and independent. Sales, for example, is (almost) always an independent variable. If you’re capacity-constrained, whether in production volume or by the number of people, your ability to produce is an independent variable that needs to be forecast.
Profit, however, is a dependent variable. It is impacted by drivers such as sales and margins. If you forecast profit, it should be only to let you know whether everything is adding up the way you expect it to, not because you harbor illusions that you can control profit directly. Keep these differences in mind when determining what key variables are most important to focus on when forecasting.
2. “Roll Up” from Detail to Consolidated and Back Again
As an example, a sales forecast starts with what each sales representative expects to happen, and each of those numbers are plugged into a consolidated forecast. A time-to-market forecast for a software product starts with the individual programmers working on the project, then projects a schedule for completion of each stage. The forecast determined by the department or team, in turn, shows other departments what they must be prepared for, including where there’s likely to be a crunch.
3. The Meaning of Forecasting is in the Process
The components of financial forecasts will include numbers such as sales or production volumes, administrative expenses, and overhead spending 7, 30, or 60 days out; compares those numbers to the plan established at the beginning of the year. If there’s a disparity, you know that action must be taken—either to bring the numbers closer to plan, or to adjust operations to the forecast number.
To forecast correctly, you'll need to ensure you're working with ACCURATE data.
Go back to that sales forecast. What if it’s below plan? What if it taxes the company’s production systems to the breaking point? Or that time-to-market forecast—what if it’s not fast enough to beat a competitor? The plan provides a benchmark that you measure the forecast against.
The negotiation and adjustments, not the mechanics, are where you find the meaning and value of forecasting. Put simply, a forecast is the raw material for managerial action, adaptation, and adjustment. The forecast informs your business decisions, letting you manage the numbers now before it's too late to do so.
Learn more financial forecasting at our Discover the Game Workshop.
Other articles you might like:
.png)
