Revenue Forecasts Initiate Business Planning
Forecasting Effectiveness can be Improved Only Over a Period of Time
Nov 15, 2009
Unlike predictions, which the predictors assure their listeners will definitely happen, business forecasters know the risks involved. Attempts are continually being made to enhance the accuracy of forecasting process, and also to minimize the risks of forecast-based decisions.
Business Forecasting for Day-to-day Operations
Sales forecasts determine the levels of production, inventory and manpower requirements in the short term, and capacity building in the longer term. Forecasting sales involves forecasting several things like industry demand, competitor actions and economic conditions. In the longer term, technology developments and demographic changes can also affect sales.
For day-to-day operations, sales forecasts are best developed based on feedback from the field sales force. The people in the field know the ground realities, and might also be aware of the plans of their customers that affect the demand for the product. This forecast is then adjusted for the estimated impact of any new marketing campaigns and other factors known at corporate levels.
Different Types of Forecasts
- Demand Forecasts: Demand forecasts can look at the total demand for a product, and the share of the demand that a particular company can expect. Industry reports prepared by industry associations and market research organizations are sources for estimating total demand. A company then looks at the trend of its own market share, and estimates the demand that it can expect.
- Sales Forecasts: Demand and sales are distinct; demand is the potential while sales require tapping the potential effectively. Things like distribution inefficiencies can affect the effectiveness with which the demand potential is tapped. Sales forecasts are typically initiated based on reports from field sales force and even major customers.
- Financial Forecasts: Financial forecasts are more than the financial plans that translate sales forecast based operating plans into financial terms. Financial forecasts go further and seek to project future financial outcomes on the basis of economic and market indicators, and historical cost performance record.
- Business Forecast: Business forecasts seek to look even more broadly at the future scenario by forecasting political, economic, demographic and technological developments. Based on this scenario, potential business opportunities are identified.
Forecasting Methods
Both quantitative and subjective methods are typically combined to develop more dependable forecasts. Quantitative methods include projecting historical data into the future using various statistical techniques. Subjective methods broadly involve getting the opinions of experts with specific knowledge of the area. The experts might review the historical data, and consider factors that can affect performance in the future, and revise the quantitative projections upwards or downwards.
Methods like Delphi make the subjective methods more systematic. In the Delphi method, a facilitator obtains forecasts (and reasons for them) independently from several experts. An anonymous (without names) summary of the forecasts and reasons is then prepared and distributed to the experts, who might then revise their opinions (without the pressure of group dynamics). After several rounds of such reviews, all the experts or most of them might agree on a common forecast.
Methods like Delphi are used more in forecasting technology developments.
Business Use of Forecasting
In addition to preparing operational and financial plans, demand forecasts are used for pricing and capacity expansion decisions. Larger businesses use region wide demand forecasts for managing their supply chains. The right quantities of products at the right locations at the right times can significantly improve their bottom lines.
Longer term business forecasts can help enterprises with their strategy formulation exercise. Emerging business opportunities (and businesses that are declining) can be identified and necessary plans and actions can be initiated.
Forecasting is estimating what will happen in the future. This exercise has to be done in the face of many uncertainties, and any decisions based on them carry significant risks. Yet forecasts are unavoidable for developing business plans and controlling operations. Statistical and subjective methods are combined to develop as reliable forecasts as possible.
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