Instead of using technology to put your numbers through fancy contortions, use it instead to solicit information from your staff, quickly and efficiently.
So says Kevin Phillips, MD of idu Software, who adds that it takes a bit more work to do this research than simply to run the year's figures through a clever algorithm, but the benefit goes beyond more well-founded forecasts.
“A lot of business planning depends on forecasts,” says Phillips. “And in the quest for ever more accurate and reliable forecasts, a lot of people turn to increasingly fancy tools and algorithms.
“But what if the problem with your forecasts isn't the tools applied but the approach to forecasting?” he asks.
If the basic strategy is wrong, adds Phillips, no amount of fancy processing will improve the quality of forecasts. In fact, it could make things worse, by masking the incorrectness of the data and giving a dangerous false sense of confidence.
He explains that no prediction of the future can be better than an educated guess; however, he adds that guesses can be improved by increasing the quality of the information they are based on. If the forecasts for the next year are based on nothing more than the year's figures, their value is low.
According to Phillips, some of the most critical issues to consider before embarking on any forecasting exercise include understanding how much the business can expect the following year compared to the current one, and identifying things that are going to make next year different.
The question of what might change for business next year is not one that can be answered by the finance department alone, he adds.
“Sure, there are some high-level variables available from professional economic analysts, but when it comes to the specific issues that might affect business, managers and operational staff may assist,” he notes.
He suggests an easy first step is to ask the question: “Is it reasonable for us to assume that you'll match this year's production next year?” If the answer is no, seize the opportunity to find out more. What do your sales staff know about what competitors might be planning? What do your production managers know about a supplier that's facing difficulties?
If people know that their input has been heard, they're typically more inclined to commit themselves to turning those forecasts into reality - and to contribute intelligence to next year's forecast in turn, he concludes.
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