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Business Forecasting

Written by: David Morcom

Article Overview: Developing a business forecast provides management with strategic and operational insight leading to improved business performance.

Business Forecasting

Developing a business forecast provides management with strategic and operational insight leading to improved business performance. It is the basis of budgeting and provides the information that allows managers to manage. Without a business forecast a business is simply responding to the day to day operating environment and has limited capacity to maximize future opportunities or minimize potential risk.


What is a Business Forecast

A Business Forecast is a prediction of a businesses future financial performance. It includes forecasts for revenue and expenses from which future profitability can be determined. It is not a detailed breakdown of revenue and expense items (as in a budget) but a higher level view of the business considering the main drivers of business revenue and expenses.

The term Sales Forecasting is often used were a forecast only encompasses the revenue component of a business forecast.


Benefits of a Business Forecast

Building a Business forecast provides insight into both the current and future performance of a business. Building a forecast should involve an assessment of the dynamic environment in which the business operates. Simply considering these issues often allows a business manager to perceive the business in a more strategic manner. This has the capacity to improve decision making and the overall strategic development of the business.

A Business Forecast can (and should be) the precursor to budget development. Developing an overall forecast and using this as a frame work for budget creation improves budget accuracy. This occurs due to the quantifiable approach applied in a valid forecast. It is not simply changing the revenue or expense by some arbitrary percentage. Instead a forecast considers changes in the factors that influence the revenue or expense and uses these to calculate the future value.

The impact of business decisions on business performance can be analyzed using a forecast. This includes decisions related directly to the business micro environment eg products and services offered and the macro environment eg changes in the target market.

Sensitivity Analysis applied to a business forecast allows a range of possible outcomes to be reviewed. Providing worst case to best case scenarios and allowing the business manager to assess, monitor and implement actions to best deal with these possibilities.

In essence a business forecast provides a high level strategic budget overview, assists in the identification of business opportunities and risks, and provides a quantifiable framework for the development of business strategies and actions.


Building a Business Forecast

Business Forecasting methods range from arbitrary year on year variations to complex data driven algorithms. The best choice depends upon the business being analyzed, the quality and quantity of data available, the purpose of the analysis, the analytical expertise of user, and time, usability, and cost constraints.

Where a business operates in a very stable environment and has demonstrated consistent incremental variations over a number of years it may be possible to successfully apply year on year variations directly to current business performance data. This can easily be undertaken using a spreadsheet.

At the other extreme where a volume of high quality data is available, and there are few cost or time constraints the use of complex modeling algorithms may be justified. An excellent coverage of these approaches is provided by Professor Hossein Arsham of the University of Baltimore.

However most businesses operate in dynamic environments, with limited hard data, and considerable time and cost constraints. Therefore building a usable and value adding forecast for these business requires a streamlined approach, that considers the business environment and requires minimal hard data. This is achieved by utilizing the intuitive business and market knowledge of the business manager/owner and converting this into quantifiable values that can be applied to basic current business performance data (ie revenue and broad expense categories) to build a business forecast.

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Article Tags: accuracy, bu, budget creation, budget development, business decisions, business manager, business performance, business revenue, decision making, dynamic environment, financial performance, frame work, future value, insight, operating environment, precursor, profitability, quantifiable approach, sales forecasting, strategic development



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