Why forecasting is important

Many CEOs tell me they would seek more comfort and be more confident if they could keep better tabs on their financials. They have put their plans into place based on economic and market assumptions made a few months back, but will they sustain the continual pain barriers to maintain, and increasing growth?

Any company seeking growth in 2018/2019 would be wise to include a sensitivity analysis as part of the balance sheet forecast. There are many ways to book actuals, and financial teams may want to spend some time determining the best processes for their companies.

In either good times or bad approaching the future with a robust forecast is vital for all kinds of businesses, other considerations should also consider, Politics, Economics, Global Risks and Customer Behaviour.

Politics
The pollsters failed miserably to predict the outcome of the past two UK general elections, the Brexit referendum and the US presidential election.

It’s tempting to blame the influence of fake news posted on social networks, given that allegations of foreign interference via such media are rarely far from the headlines.
But Ian Goldin, director of the programme on technological and economic change at the University of Oxford’s Martin School, suggests that other forces are stronger.

“The growing extremism we’ve seen is part of a broader set of factors, of which the web is an amplifier, not a cause,” he says.
“Change is accelerating and our social-security safety net is weakening.

People are getting left behind more quickly and insecurity is growing. There is a distrust of authority and expertise. Because house prices, rents and transport costs have increased so much relative to their incomes, people are getting locked out of dynamic cities where unemployment is low, pay is relatively high and citizens are more comfortable with change and immigration.”

So where does that leave those whose job is to gauge public opinion and forecast electoral outcomes accordingly?

Earth image courtesy of NASA http://earthobservatory.nasa.gov/

Economics
The playwright George Bernard Shaw once said:

“If all economists were laid end to end, they would still not reach a conclusion.”

More than 120 years after he co-founded the London School of Economics, his wry observation has lost little relevance.

Paul Hollingsworth, senior UK economist at Capital Economics, agrees, noting that their profession has “taken a bit of a beating in recent years” for its failure to predict, among other things, the 2007-08 global financial crisis.

“More emphasis needs to be placed on possible ranges of outcomes and the associated probabilities, to enable businesses to plan for the worst but hope for the best,” he says.

Andrew Goodwin, lead UK economist at Oxford Economics, believes that “a premium on adaptability” is the smart way forward. He explains: “We find that the best approach is to combine sophisticated tools with expert insight and to identify alternative scenarios.”

Parikh, meanwhile, points to the value of “stronger intelligence-sharing and collaboration”, especially among SMEs.
Given that the Office for Budget Responsibility has dropped its 2018 GDP growth forecast from 1.6 per cent to 1.4 per cent, calculated circumspection – or what he calls “stress-testing organisations against an array of macroeconomic scenarios” – seems wise advice indeed.

Global risks
“In many respects it’s becoming easier to assess business-related risk owing to the increasing accessibility of open-source information and intelligence,” says Phil Cable, co-founder and CEO of risk management firm Maritime Asset Security and Training.

“Global competition has forced businesses to spread their wings and trade in places where they wouldn’t otherwise go. But assessing personal risks and employees’ safety, security and health concerns in places where western standards are limited is still challenging.”

The Ipsos Mori Global Business Resilience Trends Watch 2018 survey, conducted in partnership with International SOS, revealed that 42 per cent of organisations had altered the travel arrangements of their employees in 2017 because of risk ratings pertaining to security threats and natural disasters.

200 million people were connected in the late 1980s to one in which more than six billion people are connected. The silos we used to work in no longer apply. We can sell to places anywhere in the world, but there’s a downside – a pandemic can now cause a financial crisis, for instance. Hurricane Sandy, had it been bigger, could have led to a global crash.”

Customer behaviour
Forecasting how the public might spend its hard-earned cash is a far better-informed exercise than it ever has been.
So says Steve King, co-founder and CEO of Black Swan, a firm that predicts consumer trends using what he calls “the world’s most advanced database of consumer thought and opinion” – aka the internet.

“Never before have we lived in an age when so many people have shared so much information about themselves, or when this knowledge has been so readily accessible,” King says.

“It’s going to be incredibly interesting to see how the development of disruptive connected technologies such as the internet of things will change our behaviour in unexpected ways.”

To fully exploit the sheer volume of customer-related information to be found online, real-time monitoring and instant responses are imperative, he adds.

“Micro-trends are effectively created and destroyed almost overnight now. Brands must start moving with the times and away from qualitative future-gazing. They need to adopt new platforms that continually analyse social trends and offer quantifiable, robust predictions powered by artificial intelligence and machine learning.”

A final thought
Many companies do not understand the strategic importance of forecasting.

Having the right resources available at the right time is essential for efficient functioning.
In today’s tough business environment where businesses are trying to save costs it is needed that every penny is saved.
Forecasting is one way to save costs as from forecasting only companies can guess the future demand and can manage their resource accordingly. Any mismanagement in forecasting can lead to great loss in both small and large businesses.

All large companies use forecasting when formulating their strategy because without it no decisions can be made. It is true that no one can predict the future accurately, but forecasting can give a general idea about future on which present decisions can be made. Forecasting is therefore an important strategic tool for all businesses.

Paul Polman once said:
“Practically, systemic thinking can be used to identify problems, analyze their boundaries, design strategies and policy interventions, forecast and measure their expected impacts, implement them, and monitor and evaluate their successes and failures.”

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