“What do I do when my forecasts are wrong? I just divide them by 10!” – has been said by hundreds of people who have failed to appreciate forecasting… So, why is creating a forecast and dividing it by 10 not good enough?
Forecasting is not just an exercise that financial and operational teams perform every so often. It is now more than ever an integrated exercise in which all levels of management and the supply chain are involved and are willing to share information. This helps in increasing operational requirements within the organisation and demand visibility among the suppliers as well as increase the performance of the forecast itself. Organisations that use forecasting successfully have more transparency between their departments as well as share such success with their partners, distributors, and suppliers. Additionally, firms that tend to overlook the importance of their forecasts often face disruption in their sales inventory planning, that in the end leads to the company’s decrease in ability to deliver products.
Forecast accuracy is critical to the bottom line. If forecast accuracy can be improved, stock levels needed to fulfil the required rates can be lowered and the bottom line will benefit. However, many companies still ignore the considered importance of forecasts for long-term planning. Predictability, better management of working capital and an improved ability to forecast cash-flow are always at the forefront of the company’s objectives.
Additionally, the rising consumer expectations have trickled down and increased demand volatility for the majority of the products. And even as companies have got better at responding to customer demands, longer supply chains, overseas suppliers and contracted manufacturers have taken part in the control of the company’s operational processes. This makes them more vulnerable to delivery problems, quality issues, missed deadlines, inventory liability and forecasting accuracy.
Overall, the main costs associated with poor forecasting are associated with the inventory, there are quite a few other reasons why not focusing on forecasting can affect your bottom line:
- As we previously mentioned, Inventory and working capital may suffer from poor forecasting. Bad projections might cause the order of excessive inventory, which reduces the profits and depending on your industry might need to be scrapped, which is especially relevant in decreasing demand markets.
- Poor projections might have an effect on inbound and outbound goods and articles transported and lead to missed revenues when components necessary for manufacture are not available. This most commonly happens when forecasting transparency cross-organisationally isn’t set up.
- Supplier relationships often get damaged due to the poor forecasts, especially if the forecasts have had significant shortfalls. Suppliers and vendors stop trusting the forecasts and are less likely to be helpful in times of need.
All of these are pretty good reasons to work towards more accurate forecasts. And while many just ignore the over-estimated numbers, the best option is to analyse your forecast and review what went wrong. This is the best way to create an efficient and transparent forecasting environment cross-functionally and cross-organisationally. Additionally, in some cases, FP&A’s will create a forecast that is “too good to be true” and just cut the results by 10 percent. This often leads to an unfortunate trickle down of underperformance cross-functionally. For example, marketing created a forecast that looked “to good to be true”, but they created an associated budget that would have accounted for all of it. Once an FP&A cuts all of this by 10 percent the same performance would just never be possible.
Today’s globalized economy, if a company wants to have a competitive supply chain, it must adhere to a robust forecasting process that enables its business to meet the challenges of today’s business environment. If you are looking for a software that can help you do that, ProForecast financial forecasting and reporting software will enable your company to run increasingly more accurate forecasts without the need of dividing it by 10 percent.