Original article shared by Partner, Mark Gandy
Forecasting is not about predicting the future.
1. Forecasting is about trying to make better business decisions based on what we know today. Accordingly, forecasting is not a prediction. Bottom line, the forecast is only as good as your assumptions. Poor forecasts? Then the result is poor assumptions.
2. Forecasting starts at the macro level, not the micro/detailed levels. Many like to start with the details and look at history. Instead, the view should start high (where’s the market heading, what are the current trends, what’s happing in the economy). Ignore the macro level and you are flirting with disaster.
3. Key components of an effective forecast include:
A) For each significant operations segment or major customer determine expected volume of activity and target pricing in order to estimate sales.
B) Based on effective analysis of performance, determine expected gross profit margins for each segment or major customer in order to estimate cost of sales.
C) Using at least 12 months history, estimate weekly, monthly, quarterly, and annual sales and administrative expenses.
Parting Comments Finally, eventually dump the term forecast and exchange it for the term plan, because that’s exactly what we’re doing–planning the future based on what we know today. The planning process should be adaptive, agile, and collaborative. Adaptive and agile are self-explanatory. Collaborative means getting the key team involved (the sales VP, the OPs manager, the CFO).
And while we said forecasting is about trying to make better decisions, specifically, it’s about matching demand with supply. So if you are a products-based business, understanding the future demand helps you to plan production and inventory levels accordingly. The same applies to service-based businesses. There’s an art to planning excess capacity human resources when future demand looks weak. Bottom line, the goal is to get demand to approximate your supply-side products or service levels.