The capability of forecasting revenue and positioning a company for growth is a skill needed by every experienced business support consultant and management guru. A startup team might likely suffer if it lacks the ability to be able to forecast the likely profitability and financial position of a planned company or business.
Though a very overwhelming task, proper business planning with a well-thought-through financial forecast is required to validate a business especially if you desire to seek funding from venture capitalists.
A lot of entrepreneurs actually avoid the aspect of forecasting in their business plans; they do not take the time to execute it. The problem, however, is that only a handful of investors will put their money in a business without some degree of accuracy and thoughtfulness in the aspect of the financial forecast.
Business forecasting is a way of predicting the future in terms of economic conditions. It mixes information gathered from past events with a precise picture of the present economy to predict future conditions and strategically chat the pathway for business growth.
There are different methods of business forecasting but they all fall into two broad categories – Qualitative and Quantitative, forecasting.
Contents
Qualitative Forecasting
Qualitative method of business forecasting is useful in predicting the short-term success of products, services, and organizations; however, its dependence on opinion over measurable data makes it a limited option.
Qualitative forecasting is often built on the opinions and decisions of consumers and experts. This business forecasting method is beneficial if you do not have enough historical data to reach statistically significant conclusions. In such scenarios, an expert may be required to string together the known bits of data you have and try to make a qualitative prediction from the available information.
Qualitative business forecasting is also constructive for cases when there is little information about the future of the company or its business. Focusing on past data is ineffective if that data is not relevant to the unexplored future you are targeting. This can be the scenario in several industries that are fast innovating today, especially the tech companies.
A classic example of a qualitative method is market research. Market Research involves the use of search engines to get information or simply polling a high number of people on a specific type of product or service to predict revenue growth and determine growth rate from the number of respondents that signified they would buy or use it once launched.
This process helps in determining the viability of a new service or product through research conducted directly with potential customers. Market research enables a company to discover their target user base and get feedback from the target market regarding their interest in the product or service.
Quantitative Forecasting
Quantitative forecasting strives to connect different variables to establish the cause and effect of certain issues that can further be maximized to the benefit of the business. Quantitative business forecasting is applicable when there is precise historical data available to predict the probability of future events.
This method draws patterns from the data that lead to increased probable outcomes. The data deployed in quantitative business forecasting comes from business case studies and includes customer acquisition rate, customer lifetime value, product sales numbers, census statistics, conversion rates, profit margins, market share, amongst others. This method is concerned mainly with data, and it tries to predict where variables such as GDP, cost of food, housing prices will be in the long-term, it can either be measured in a week, months or years.
Sources of Data for Forecasting
1. Primary sources
Primary sources of data are time intensive because it takes a longer time to gather because they are first-hand information. Also, they are considered more reliable and trustworthy. It is the analyst or the person forecasting the business that collects the data, through interviews, questionnaires, focus groups and also analyses the data.
2. Secondary sources
Secondary sources of data do not require the same time and effort with primary data because they have already been collected and published by other organizations. They are functional and adaptable because they have already been compiled and analyzed, thus making the process faster.
Related: The need to document corporate entrepreneurial experiences
Elements of Business Forecasting
Develop an estimate of Future Business Operations: Before starting any business forecasting, it is critical to creating a projection for future conditions, such as the sequence that future events will probably follow in the industry. Your projections will be based on collected data to help with quantitative estimates for the scale of operations in the future.
Regulate Forecasts: Your forecast must be compared to actual results; regulating your forecast cannot be overemphasized. This is the primary way to finding outliers and deviations from the norm. Then the deductions for those deviations have to be figured out, so action can be taken to correct these disparities in the future.
Review Forecasting Process: Improvements can be made when the deviations between forecasts and actual performance data are reviewed as this process enables you to analyze and refine and the information for accuracy.
Steps in Business Forecasting Process
1. A problem or data point is selected: For example, “Will women in Oshodi buy dish-washing machines?” “What will our sales be in July next year?”
- Theoretical variables and an ideal data set are selected: The relevant variables that need to be considered by the business analyst are identified and also the approach to collecting the data. Assumption time: The analyst makes some open assumptions to simplify the process. To cut down the time and data needed to make a forecast, a model is selected. The analyst chooses the model that fits the data set, selected variables, and assumptions. Analysis: Using the model, the data is analyzed and a forecast drawn from the study. Verification: The analyst compares the forecast to the actual event in order to tweak the process, identify problems or in the rare case of an accurate projection, pat himself on the back.
Benefits of Forecasting
Predicting the Future
Forecasting may not provide direct information on what will exactly happen in the market and the company over the pending years, but it gives a general idea. Business forecasting offers you a sense of direction, which will enable the company to maximize the marketplace fully. Predicting the future in the construction industry can be a daunting task. But taking this step, a construction can predict future trends and then change their company objectives to achieve increased earnings.
Customer Retention
To ensure the sustained satisfaction of your customers, it is crucial to provide them with the products/services they want when it is wanted. Forecasting in business is greatly beneficial because it helps to predict product demand so that products are available and sufficient to fulfill customer orders. By deploying business forecasting to look ahead, FMCG companies can stay ahead of the competition and make sure they always have products readily available for purchase.
Learning From the Past to Look Ahead
Studying events in the past and the way they occurred will help companies predict what will happen in the future. Business forecasting has the potential to make the company stronger and more profitable. FMCG companies observe past trends and sales and employ the data gathered to predict the future. Forecasting on a steady basis enables companies to consider their future and where their company is going over a specified period. This will also help them to foresee changing market trends and keep up with the competition.
Receive Financing and Remain Competitive
Businesses that do not employ forecasting techniques will likely fall victim to their competitors within a short space of time. Having a broad idea of the level of performance to expect over time is critical, as it will enable the company plan to meet customer demand; otherwise, the company may lose customers because they will turn elsewhere to fulfil their needs.
The FCMG industry is highly competitive. More than a thousand different companies are competing for the same shelf space, and trying to attract new customers with costly advertising campaigns and labels can be an expensive venture. This is why whenever a company gets a new customer, they try everything in their power to keep them.
A forecast is required when startups are seeking funding for their new or existing business; in many cases, the financing institution will request an estimate on the volume of sales you will have within a given time-frame before considering giving you such loan, especially when it involves large sums of money.
Reduce Inventory Cost and Prepares for a Drop in Sales
With forecasting, business owners can predict how much inventory should be available at any given time. Knowledge of your stock will help your company to save cost on warehousing and transportation. It will also reduce the risk of accruing ridiculous fees or leading to discounted products because there is a surplus of goods.
Having the right volume of inventory is vital for every business because some products have a short shelf-life; for this reason, it is essential to ensure there is no surplus of product. Another advantage of forecasting is that it helps entrepreneurs to know when there is a fall in sales. When a company predicts that there will be a drop in sales, the rate of production will slow down. This then implies having limited products in the warehouse and also decreased finished goods inventory available at different stores and distribution outlets.
Positioning your company for growth in today’s world is cannot be overemphasized, considering the rate at which technology is fast changing the modus operandi of businesses.
“The biggest mistake a retailer can make today is to project the past into the future,” says Dan O’Connor, RetailNet Group president and chief executive. “What retailers need to think about is how to bring a picture of the future to the present.”
There are three different stages of position a company for growth which included the Product position, Market positioning, and Corporate positioning.
Product positioning – This is the first stage; a company has to determine how it wants its product or service to fit in the market. What type of product branding should it have – cost-effective or high quality? Advanced technology? Will the product sell to a broad audience or a niche demographic? During this stage, it is critical to pay attention to the “abstract or intangible” positioning factors, such as the quality of product and value proposition, amongst others.
These intangible elements are based on customer perceptions, not statistics and data or product specifications. Low prices and top product specifications will not always win sales. Instead, it is intangible factors that are the tools for gaining strong product positioning.
Market Positioning – This is the second stage of the positioning process, for a product to gain recognition in the market, it needs to establish credibility with customers. The marketplace has to perceive the product as a champ. To be able to build a strong market position, the business is required to understand the mechanics of the industry system, the network of retailers, distributors, influencers, and build strategic partnerships.
Corporate positioning – This is the final stage of the process; it involves the positioning of not only the products but also itself. This is implemented mainly through financial success, if the company’s profits fall, its brand becomes tainted, and customers will become disinclined to purchase products from a company in financial distress. Most times when it happens, the company often has to start over with product positioning and rebuild its position in the market.
These stages of positioning are a fundamental part of any company; they involve business planning, growth strategies, and must be supported by all the management and employees in the company.
Here are a few tips to stay ahead and help position your business for growth:
Focus on Collaboration – To execute these stages of growth positioning, you need to build reliable and trusting relationships with customers, employees, and partners. Collaboration is central to building an organization where information flows freely, and innovation thrives. Furthermore, find ways to leverage social media to engage and collaborate when necessary.
Create a Learning Culture – Stay open and curious always. It is important to connect with other individuals outside of your organization. “Change is so fast that exchanging information and knowledge is critical,” says innovation expert Gundry. “Think about forming alliances and joining trade groups.”
Invest in Talent building – Regardless of the high rate of unemployment in society today, many companies are still struggling for skilled professionals because they are in limited supply. Warning of “unparalleled talent scarcity,” a 2011 report by the Geneva, Switzerland-based World Economic Forum predicts skilled worker shortfalls of 25 million in the United States and 45 million in Western Europe by 2020. Investing in talents as an entrepreneur will give you edge cutting advantage over competitors. This involves employers retraining employees who need additional skills and also providing intensive training for new employees.
“We’ve taken technology and embedded it in everything, but if you don’t have people capable of using those technologies to innovate products and services, the technology is junk.” – Edward Gordon, founder, and president of Imperial Consulting Corp.
Quick Summary
Prefer the short version? Here is a concise recap of the key ideas in this article.
Qualitative Forecasting Qualitative method of business forecasting is useful in predicting the short-term success of products, services, and organizations; however, its dependence on opinion over measurable data makes it a limited option. Qualitative business forecasting is also constructive for cases when there is little information about the future of the company or its business. Related: The need to document corporate entrepreneurial experiences Elements of Business Forecasting Develop an estimate of Future Business Operations: Before starting any business forecasting, it is critical to creating a projection for future conditions, such as the sequence that future events will probably follow in the industry..
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