Better forecasting for better business
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In order to successfully compete in today's fast-moving business environment, it's very important for a company to develop the ability to read the future clearly based on available uncertain information.
Most businesses are used to typical short-term and long-term planning as part of the annual management practice. Moreover many companies require a monthly rolling forecast to be done after each month-end close. The profit and loss forecast must be as accurate as possible because an action plan has to be developed. There are also several perspectives such as the operating result of the product group, the individual company, the division and the group as a consolidated financial statement.
Meeting the forecast number is crucial in business management, especially for companies listed on the stock market, where the actual result can be highly sensitive to the sentiment of investors. In certain situations, management has to commit to achieving the forecast target, and it can mean “live or die” by the actual performance. Unfortunately, under current fast-moving operations, accuracy of forecast results can be hard to obtain. There are a number of uncertainties to be encountered due to the speed of change, such as in economic information, actions taken by competitors, internal adjustments, and uncontrollable outside factors. For example:
Sales revenue can be affected either positively or negatively by a rapid change in consumer behaviour and information about products and services on the Internet.
A new investment opportunity – such as a new sales location, new product development, new technology for machines in the production line, or a new joint venture – can emerge without any prior signs but will need fast decision-making.
Expense control against the budget and forecast becomes harder than before. The cost of business operations can be increased due to higher costs of energy and wage increases and so on.
Organisational structure has to be changed quickly in response to business challenges and past outcomes. This may lead to a new target set-up for better efficiency and cost savings.
It appears to be obvious that effective managers have to deal with increased unplanned incidents in a more effective manner. That means the new approach to business forecasting needs to take into account the new challenges, and seek new tools in formulating business strategies. The following are the changing environments and trends that should be observed and considered, especially in making the right forecast.
Development in business activities will not be linear. We may be familiar with thinking about the business process as a step-by-step process that flows from one function to the next. But in many cases, it’s not practical to wait for an action to be taken before the next one can be done. Several actions may need to be handled in parallel.
Future performance may not be approximated based on past results. It could be wrong to easily use average numbers of past actual performance to forecast the future. With new factors showing in the planning process, a big change in the forecast number can happen. Annual sales growth of 5 per cent average from the past three years will not be valid in setting the next-year target when competitors can grow at up to 20 per cent.
More exceptional cases can be seen. In the past it seemed to be unusual when an exception occurred that required special efforts to be put into it. But nowadays, dealing with exceptions is more frequent. It might be an exception to the current procedure, policy or organisational norm. Without proper handling of these exceptions, a company may find itself in a stagnant situation.
High impact incidents may need to be incorporated into the business plan. It is reasonable to be aware of the possibility of a high impact situation that can cause a rapid change in strategies. Risk management and assessment techniques are being challenged more than ever.
In order to cope with the challenge of unexpected incidents and uncertainties, businesses should be open to new ways of doing business by challenging traditional practices and creatively finding new solutions. Making changes in business practice becomes part of the routine work for all employees. But before achieving a target, an individual must be able to make his own changes in mindset that can help prepare for any uncertainties.
Yanyong Thammatucharee is senior vice president for accounting and finance at Central Marketing Group.
