Small Business Forecasting – Full of Bear Traps
We all do so much planning – short term to meet the needs of the project just about to finish, medium term managing workload for vacations, long term thinking about that new office space required because sales are growing. There are so many aspects of planning that we often are planning without realizing that we’re doing it – it becomes second nature.
The same is true with forecasting; whether we are reconciling cash flow for the next month, buying office supplies, or planning a new office space, we are always forecasting. In fact, just about every time we do any planning we need a forecast, and every time we make a forecast we need a plan. The symbiosis of these two activities is unavoidable and it is full of traps that can cause us to lose money (or worse). We can also use them to help improve the bottom line in important but subtle ways. What we at Galileo Analytics can help you with is the combined planning and forecasting process. We know where the bear traps are hidden, and methods to avoid them. Our motive is to help your business, not to try and up sell you to something else during the process.
We’re not talking here about a business plan aimed at investors – we can recommend experts in that field, and it is a specialist arena with bear traps of its own.
We’re talking about the kind of planning that comes when you are running the business. These plans fall into one of the following three categories:
- Longer term planning (next 1-3 years) where you are exploring the strategic nature of your business.
- Medium term (2-4 quarters) where you are seeking to plan the execution of your strategic plan but also need to deal with the transition from current operations.
- Short term (1-4 months) dealing with purely tactical operational issues.
These three should merge together so that they are seamless, and this is Bear Trap #1
Bear Trap #1 – tactical and strategic forecasts that don’t blend
The tactical forecast looks at things you’re doing today – current customers, current products and services, current facilities. Strategic forecasts include all the things that will have changed in time – new customers, a new product launch, a new process going into production. At some point these two sets of operational circumstances are going to have to blend together and there will be a transition – and your forecast needs to take that into account.
The solution is to ensure that you have a process in place that allows these different plans and forecasts to blend together. Simple adjustments to the planning process can reap huge rewards (and lower your stress levels).
Bear Trap #2 – forecasts and financials don’t match up
We’ve all been there, a month or two of financial performance that is out of line with expectations and a forecast that doesn’t take the variance into account. Whether good or bad, significant variance from budget creates the need to reassess the forecast. This doesn’t necessarily mean changing your budget, but the forecast must change so that tactical decisions can be made in line with the new expectations. This way the new situation can be reflected throughout the company and correct tactical decisions can be made (like increasing supply acquisition to meet increased demand). Failing to do this can result in disruptions that end up costing money – even though your sales are going really well.
The solution here is a system approach that links forecasts to budget to actual performance. Time spent making sure that these are connected can make all the difference in the world when making critical adjustments.
Bear Trap #3 – forecast assumptions that simply aren’t realistic
This is the biggest strategic forecasting trap. Making assumptions that have little or no chance of actually being real. This creates a forecast that has no chance of being reliable. Decisions will be made based on a false forecast and the business will suffer. Typical problems are:
- planning for new product introduction
- impact of competitive activity
- staff turnover costs
- adjustments due to the overall economic/political/demographic environment
- new technology (both within your own operations and external factors)
Getting these wrong (up or down) will significantly impact your forecast.
An independent viewing of your plans and forecasts will help to identify where assumption errors are being made – especially the implicit assumptions that are too often ignored.