Commit to the process
You need to commit to the process of forecasting and not be limited by the natural fears and frustrations that can occur. Even if you never forecasted before, there are lots aids. Here are two:
First, just take a peek behind the curtain and see forecasting for what it really is. It’s a process like anything else, and simply participating in this process and understanding the mechanics of it are often just as important as the actual numbers. Frankly, the numbers always change and require constant development, testing, measurement and adaptation.
Secondly, follow Nike’s advice: JUST DO IT! I have developed hundreds of forecasts, and the more clients take charge, understand the variables and suggest changes, the better the forecasting is. For example, last week we helped a client allocate their inventory to better stock their shelves and improve productivity. In this case, simply having to add a fixed inventory goal at 100 percent made noticeable improvements.
Dynamic forecasts: or the art of understanding that life changes
Many forecasts are based on simple relationships, a few variables and one point in time. In reality, truly helpful forecasts require integration, change and have interaction among factors. For example, pricing, marketing and sales all affect one another rather than being separate. None exists in a vacuum. That may seem obvious, but most off-the-shelf models do not deal with them together. Similarly, forecasts that simply grow future sales by a percentage can be less effective because sales, marketing and costs do not all vary simply by volume.
Many planning programs put financial plans at the end of the process. Startup Connection helps client’s starts as early as possible with a forecast and then revises as programs develop and relationships change. For example, companies need to determine sales, growth, profit, and cost parameters and interaction while they are developing programs.
The plans that ignore financial and performance realities end up with the proverbial “hockey stick” graph of explosive revenue growth. Entrepreneurs frequently detail initial programs and assumptions they will then assume 20-50 percent growth rates (the hockey stick with little analysis of assumptions, resources or programs). It may look nice on paper, but it usually gets pretty ugly in real life.
Simplify wherever possible so you do lose sight of the forest for the trees
How do you make forecasts simple and still be dynamic and integrated? Focus on what’s important. Follow the 80-20 rule where 80 percent of your sales will almost always be represented by 20 percent of your offerings or customers.
We have helped saved clients over $2 million in the last two years by simply reducing slow-selling items and conversely being in stock and focusing on the most effective marketing programs. How many times have you been to a grocery store sale where the basic items are out of stock in a few hours and the weird stuff is there forever?
Simple also relates to the characteristics of your forecasts. Focus on factors that really affect your business so you can understand them and estimate factors that are not as significant. For example, look at aggregate costs and administrative expenses rather than trying to forecast small items like telephone, utility, and insurance costs on a monthly basis. Also, forecast on a quarterly or annual basis and then break down months only if necessary.
Bias: Whether we admit it or not, we all have biases
The biggest problem with forecasting is bias. Analysists love to discuss mathematical formulas and measurement in affecting bias; however, most bias especially in small businesses, is simply human. Your assumptions, analysis and data can all unknowingly affect results. Variances in political polls are the obvious example but there are many others. For example, analysis of different age groups like millennials and baby-boomers can vary simply by using different starting and ending birth years.
Because we love to be right, we frequently will go to extraordinary lengths to make sure that we’re proven correct. Many times we don’t even realize we are doing it. A simple suggestion is to develop failing, realistic and optimistic forecasts and examine the reality and probability of the differences.
Keep the goal in sight: improving your decision-making
The goal of forecasting is to improve decision-making and identify great alternatives. Focusing on satisfying investors, suppliers, employees, etc. is simply an invitation to long-term problems. Similarly, you need to understand the goals, timeframe and precision in your forecasts. Are you simply trying to make a living in a short time or build a giant business that you know will lose money in the first few years?
One of the crucial aspects of decision-making is risk and outcomes, which are greatly affected by probability and information. Predicting results where there are significant and consistent historical data can be fairly simple; however, predicting results for new programs or with little or inconsistent data requires developing educated estimates.
Just remember that it is a process, and you will make mistakes. The goal is to learn from them and continue to improve. In summary, more consideration of the some of the issues above will lead to better forecasting. In general, I also believe we are overly concerned with the consequences of mistakes than the potential of risk. Thus, don’t be afraid to test new ideas and adapt to their results. This approach is well stated by Sheryl Sandberg in her comment, “What would you do if you weren’t afraid?”
Dr. Bert Shlensky (Bshlensky@startupconnection.net ) and Startup Connection (www.startupconnection.net) help entrepreneurs and small business owners maximize their capabilities and opportunities. We empower clients to understand and balance the risks of failure and the rewards of success.
We provide entrepreneurs with tools and recommendations to facilitate operating a business. Our focus is on understanding and analyzing the dilemmas and challenges to help entrepreneurs have better results, avoid mistakes, have greater efficiency and become profitable in less time.