In business, it can be a comfort to think you know what's coming. But forecasting isn't simply about passively identifying trends and narrowing down possibilities: Just as watching the weather forecast will tell you that it might rain tomorrow, just knowing that fact isn't enough to keep you from getting wet if it does. The only thing that can protect you from this probable fate is if this forecast makes you inclined to get an umbrella.
A Forecast for Action
The forecast is only valuable if it leads to an action that helps you mitigate against a negative trend or take advantage of a positive one. It can be easy to take solace in the seeming power of knowing the who/what/how/why/what of some possible event, but without an actionable plan, you become a passenger on the way to a future you cannot control.
In this way, FP&A professionals should look at a forecast as an opportunity to test plans of actions in addition to identifying trends. To do this, you must look at historical data, broadening your data set out to not only include causes and effect drivers, but also to consider how effective mitigation tactics were. The goal is to not just look at how the environment changed, but at how the response to change drove sales and budgets as well.
"Say prices do spike: what then?"
Take, for example, if you are a car tire manufacturer trying to track the way oil prices impact your sales. Looking at historical trends related to oil prices, it is likely you can identify signs of a price surge and you understand the baseline impact that will have on your sales - higher prices mean higher costs for rubber, fewer drivers on the road, lower replacement rates, etc.
The good news is that, with a comprehensive forecast, a price spike is unlikely to sneak up on you. But, so what? Say prices do spike: What then? Sit back and say "I told you so" to your shareholders while your enterprise bleeds dry? This attitude is a cold comfort when faced with the prospect of serious losses.
The key to making a forecast into the powerful tool it can be is turning that "So what?" into a "Do what?" This turns it from a sort of prophecy that one stands idly by and watches come true to a prediction, a guideline for future action.
"What actions had the greatest positive impact?"
When using forecasts to decide what action to take, look not only at how supply and demand trends turned out in a historical environment, but also examine how effective the efforts of manufacturers and suppliers were under the circumstances. What actions helped the situation? Which in the long run turned out to be wastes of time and energy?
Look for what actions had the greatest positive impact in the context of an environment, event or trend, and include these actions against your forecast models. This can take the form of forecasting multiple pathways for addressing changes in the market, with examples of mitigating actions being planning for the right inventory levels, required promotions to retain top-level talent and the flexibility to operate at lower margins to ensure continuity.
With this model of action-driven forecasting, enterprises can:
- Mitigate against adverse sales conditions.
- Create course of action (or multiple courses of action) to maintain profitability.
- Course correct operational issues before they become unwieldy.
The goal, as we've stated, is not just to know for the sake of knowing. We should always be striving to make our forecasts actionable, using the questions they bring up to drive our daily operations.