Banking & Finance and Small Business & Startups

What's your company's forecast?

September 30, 2013
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What's your company's forecast?
The Weather Channel films a news segment on wildfires in the west — which likely weren't a part of any forecast. Photo via fb.com

Have you found the perfect crystal ball to accurately predict your company’s future?

As a small business owner, budgeting is not something you get excited about, but, rather, a necessary part of your business development.

Forecasting

Rather than a static, rigid budget, many businesses use forecasting to help determine their company’s future and monitor the progress.

Forecasting remains a hot topic in the business world. Many experts suggest your forecasting budget be separate from an operational budget. Your forecasting budget doesn’t focus on the minutiae. It focuses more on a higher level, top-down projection, and it’s separate from, but integrated with, the operational budget. It’s another management tool to help determine if you’re reaching new targets or improving outcomes on other targets.

Forecasting allows organizations to close the gap between the overall strategic plan and the detailed operational budget. Forecasting can be challenging due to changes in the economy, market forces and legislation, to name a few. For instance, experts give us a sunny outlook one day, which can be followed by a stock-market plunge.

Data

Depending on your business and your industry, this determines how far ahead to forecast. More new data and/or information incorporated into the forecasting model generally improves the success of forecasting. Using historical company data, government data and industry specific information will assist in determining the forecast horizon.

Risk analysis

Successful forecasting takes into account risk analysis. Many companies that developed forecasting techniques have had mixed results, because they tend to overlook risk techniques. There are many different tools to complete a risk analysis, and it’s a useful exercise for the leadership team to complete.

Because we live in a non-linear world, there can be positive and negative variances from forecasting. Forecasting should be long-term, as well as short-term. To account for future changes, business people should take into account the risks and opportunities of each project. Risks should be assigned a value: the higher the risk, the more likely it is to occur.

Technology also breeds changes. As we are immensely more connected than even five years ago, technology such as smartphones and apps add fuel to the fire of increasing change. Getting things done in a complex environment remains an uncertain challenge. There’s also accelerating change related to politics and social change. Globalization, economic issues, diversity, are all factors that need to be considered.

Chaos and patterns

What does this mean for the small business owner? Remember that risk and forecasting are directly affected by chaos. Chaos experts tell us when there’s chaos in a system, there’s splitting, but out of this process comes a pattern, a coherence and stability. A lot of people want our world to be linear –– there’s always an answer for everything. Unfortunately, that’s not the way it works.

The chaos theorists tell us we have to add risk factors to get the correct answers and, thus, the correct forecast. They tell us chaos should be taught, and we can have tools to prepare for the risks. Experts and researchers have outlined some principles of chaos related to business and forecasting. Expect uncertainty and allow for it. Researchers have found paradoxically, studies on chaos tell them some things can be predicted. Determining which things can be predicted is the challenge.

Setting in motion

Many executives today admit they’re uneasy about their ability to make forecasts, as well as set goals, achieve objectives and meet their budgets.

But in today’s environment, small businesses have to improve and expand their efforts.

Operating with a budget and three-fiver-year forecast provides a tool to assist in decision making, handling growth and risk management.

The forecast should be used as a tool to build scenarios and factor in pertinent information that will impact your company’s decision making and future. 

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