When organisations are asked what they think their revenue will be next year, the answer is usually based on looking at what they have seen happen in the past and then comparing it to their revenue goal.

Year after year these organisations repeat the same business planning cycle of historically based goal setting. First, you set your revenue goal, then you tell your investors, shareholders and all other-decision makers. Once that is decided, then they look to what they NEED to do to reach such goals. And only after all of this, businesses begin to budget and establish the true cost of such goals!

THE PROBLEM

The problem with such planning is that it is based on past forecasting and past knowledge. It assumes that the future will be the same as the past, but that is almost never true! Such plans assume that the spending will continue to follow the same pattern that it has done in prior years. But in this environment where automation is key to quickly generating revenue, costs now tend to CREATE revenue, not the other way around. Take for example a plain old email marketing tool, it can cost your business up to a couple hundred pounds a month, plus the resources it requires to run. However, the outcome from running such tool can directly increase your sales.

Another problem with such forecasting is that it assumes your market will stay the same. You are assuming that your business will maintain it’s market share with no additional effort, that no new competitors are going to join your market and that your market will stay the same overall. In a current technological environment, this is practically impossible. Automation, fast manufacturing turnaround times and continually changing consumer behavior means that no one business is safe against such changes.

THE SOLUTION

The problem with business planning, as it is done today, is that it focuses on reviewing the past results and comparing it to the goals, rather than concentrating on business performance. And many tend to concentrate on researching why the real world is different than their plan, rather than looking at the results of the real outcomes and improve business performance accordingly.

This type of business planning creates incentives to make short-sighted business decisions that don’t tend to carry value to the long-term performance of the organisation.

One should concentrate their efforts and focus on customer/consumer behavior, instead of concentrating solely on past performance. Ultimately, financial results are the outcome of underlying behavioral changes. If you just assume that past results are just going to continue in a similar fashion, you are inevitably straying away from the behavior changes. This eventually will distance your forecast and business planning and create unrealistic results.

In the current business environment, one cannot assume that the market will stay the same and that there will be no behavioral changes in any industry! As a result, grounding financial plans in customer behavior makes financial forecasts more valid – and therefore useful.

 

Are you looking at how to improve your financial forecasting and business planning?