Why is forecasting important for any business model?

There’s an African proverb that says, ‘For tomorrow belongs to the people who prepare for it today.’ It beautifully encapsulates the importance of preparation and forward-thinking. In the business world forecasting should be the first step of any strategy or plan.

While it isn’t always considered everyone’s favourite task, forecasting is vital – whether you’re a startup, established SMME, or even a multinational. It’s what helps you make adjustments when the needs of the market change. And quite frankly, without accurate and honest projections, you’ll struggle to meet the market’s demand while impacting your own internal overheads and delivery.

Here are some of the major ways that forecasting influences a business:

Tracking operational income versus expenditure

Here’s a practical example: Your three customers buy 30 apples and you have three baskets that hold 10 apples each. Each basket is held by one of three staff members. What happens when your customers want to buy 60 apples? You’ll need to increase your baskets and staff complement, of course.

Forecasting allows you to plan for these types of scenarios before they happen. If your customers’ demands increase, you know you’ll need to increase production and capacity, or analyse how you’ll be able to deliver these new demands in a smarter way.

If you fail to plan operationally, there’s a good chance that a) your delivery will lag; b) your production will be over capacity; and c) you’ll rush to fix issues that might cost you more than anticipated and impact your profit margins. 

Shareholder feedback

For shareholders the bottom line matters. Essentially, they invest because they want to see a profit – not stagnation – in a business. They need to know exactly what to expect and they need accurate financial forecasting.

At the same time honesty is important here. There are numerous cases where management inflates forecast predictions, hoping to make it up in the months ahead or to appease nervous shareholders. But this can backfire spectacularly. Inaccurate forecasts could be to an organisation’s ultimate detriment, as they may result in shareholders’ losing trust in the management team and its ability to forecast.

The ability to course-correct and adjust

When a plan is laid out and available for everyone to see and follow, it becomes like a roadmap. You know where you need to go and by when you need to get there. In the same way, a forecast is a map for a business. It shows you what you’ve committed to and what you need to do to reach the objectives.

So, if your Q2 figures are drastically down from your predictions, you know you’ll need to adjust your strategy for Q3. A forecast also provides a management team with a clear indication of how the business is tracking, allowing for intervention and adjustments to take place before it’s too late.

Clear expectations equal calmer waters

Uncertainty leads to anxiety – and a distressed team is often unable to perform at high levels. Setting clear expectations in a forecast that everyone agrees on prevents goalposts from being shifted or the team being uncertain of what’s required of them.

A relaxed and focused team results in higher productivity and increased trust, which in turn lead to employee happiness and staff retention. Ultimately, a plan and clarity put everyone’s mind at ease.

A report that surveyed over 300 companies identified some of the characteristics of top-performing businesses. One of the biggest differentiators is how successful organisations used forecasting as the first step in their planning. It’s unsurprising, really, because like the African proverb says that tomorrow depends on what you do today.

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By | 2021-01-07T16:30:42+02:00 January 7th, 2021|Investment Banking|0 Comments

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