What Will I Learn?
Business planning and forecasting are about defining a strategy to meet the growing needs of a company. It involves making a vision of the future and identifying strategies to attain the goals.
Forecasting provides valuable input for the development of a strategic strategy for a firm. A firm, often an industry leader, should use forecasting to identify the future direction and to develop a plan (strategic plan) to guide decision-making.
Forecasting enables a firm to determine whether it has a competitive edge (positioning) and whether it should expand (differentiation). Differentiation is the ability to identify your product set and provide superior service to your target market by emphasizing the unique attributes of your products.
Businesses are often faced with tough choices – Business planning and forecasting combined are used to make business decisions such as:
- Do you continue to operate under normal trends or worst-case conditions?
- What drives the best decisions during times of uncertainty?
- New trends in the market of your industry?
- Start-up competition?
- Business planning and forecasting also allow us to help you find new benchmarks for forecasting with our ultimate guide to understanding business forecasts.
What Is Business planning & forecasting?
Business planning is an exercise conducted by a company, firm, or business to evaluate where the company or firm is in terms of its activities and policies; future trends; and how to keep up with the competition. For this, a complete business plan has to be created.
It would be best to look at your business plan as a guideline for your business rather than a strict document. It would be best if you made a detailed business plan that will outline the essential aspects of your business. A business plan should include all of the following:
- Your goal
- Your vision
- Your mission
- Your vision and mission are very similar. Your vision is what you want your business to be, while your mission is what you want your business to do.
- Your business plan should also include your product, marketing, sales, and distribution.
- Your business plan should be clear and concise.
Business planning comprises the following elements – a strategy including the mission, vision, and values of a business and a clear understanding of their product or service. The strategy involves identifying the market, and the business needs to determine their competitive advantage, brand equity, value proposition, and pricing. Once that is done, a business usually creates an expected sales curve which guides to the expected revenues, expenses, net profit, etc. based on the sales volume/sales target.
Business forecasting, on the other hand, is a process that is commonly used to determine the revenue and/or profit of a business on an ongoing basis. This is done by analyzing the past performance of various departments, and predicting the demand for certain products, services, etc. with the help of the most trusted sources like demand, suppliers, competitors.
Business planning and forecasting play a key role in making any business more agile and effective. It makes the organization more flexible and proactive thereby encouraging new innovation. It gives a clear view of the company’s future, with a better understanding of the market. It guides the decision maker’s actions to take advantage of the various opportunities offered.
How does forecasting relate to planning?
Although forecasting can make a company more effective, and plan better for the future, it can be a bit complex. For this reason, planning is of great assistance in order to understand the company’s operations, strategy, values, and competitive position. It also shows how the various processes and initiatives will work together.
Business planning and forecasting are closely intertwined and usually work hand in hand. Planning is an exercise that forecasts the success or failure of a company strategy whereas forecasting identifies the demand for products and services and determines the success of the strategies with the help of various trends. A well-planned and executed plan usually translates into the ability to deliver the promise. That is forecasting.
What are the steps in business forecasting?
Business forecasting, as mentioned before, is about the demand and supply for products and services. That itself is a lot. To start, the forecast should be made with the help of various relevant data and information which will give the company a sound perspective about the current situation and future trends.
If you have to sell and grow your business, you must understand that this is a business. It is a matter of supply and demand. You can’t force anyone to buy from you. You need to have the skills to make people want to buy from you. You need to understand the needs of your customer and the needs of your product. You must know what you are selling and what you have to offer. You must be able to communicate with your customers to make them want to buy your product. You should also be able to provide good customer service to be trusted.
This will take the company towards making better decisions that can be used to change the company’s direction. The goal is always to be better. One needs to understand the current market status and trends to make an informed business planning decision.
Data can be of various types and can be derived from various sources. The types of data include:
- Market Data – This should include the demand, sales, pricing, revenue, and expenses
- Product Data – Should include the type of product, specification, and features and their costs
- Sales Forecast – Shows the sales, cost, product demand, etc.
- Industry Data – Shows the sales, demand, production, cost, etc. from competing companies
- Internal Data – Refers to the current and previous trends/patterns of data
Data should be organized on a spreadsheet in an Excel model with the help of financial formulas that will determine the output. These Financial formulas can be calculated using the inputs given through different sources of data to create business planning and forecasting statements such as the sales forecast, profit and loss forecast, cash flow forecast, and balance sheet forecast.
Is there a difference between planning and forecasting?
In essence, business planning and forecasting are about determining the financials of a business over a period of time and also for making business decisions. Planning is about a set of projects that are all linked to each other in a single framework and where various departments work together in a single direction. The company needs to make a decision and implement it immediately or at a later date. This is quite common in industries like construction, real estate, automotive, manufacturing, etc.
However, forecasting is a technique used by companies across all industries to decide their direction. Usually, it is done on a quarterly basis. It involves the estimation of demand, sales, production, etc. for a whole quarter.
How forecasting is important in planning and decision-making?
Business planning and forecasting can be extremely helpful in identifying various trends in the market and how they will impact your business. It helps in making decisions on various issues regarding your business. Such as:
- Which product and service to offer?
- Is the product/service you currently have in the market right or do you need to move to a new product/service?
- How much is the demand for the business?
- What are the strategies to be adopted to stay ahead of the competition?
- Where do you need to increase/decrease production/capacity/staff?
- How will you cope with the demand/profit?
Forecasting is important in business planning because, without it, there will be no clarity of the present and future. It also gives an idea about various factors such as the growth in the market, inflation, etc. This helps in making decisions regarding the future of the business.
The use of business planning and forecasting
In its management of a business day to day operation, the management team uses business planning and forecasting skills by taking inspiration from its past successes for the realization of future goals. First, the corporation creates its strategic plan. Strategic business planning and forecasting involve outlining a corporate mission that will guide business endeavors and developing business goals that support and define the needs of the organization based on the current and historical market data.
Next, the corporation sets corporate objectives. These objectives identify the metrics and measures that will define its progress. These are measurable outcomes to the goals outlined above. Finally, the corporation plans execution. Execution planning outlines the operational and administrative activities required to achieve the plan goals.
A business plan describes the future, with financial details. The goals for the future are set forward so that executives know what to aim for by what time and with what money. The company’s mission is clearly stated, as well as goals that will impact its finances.
Finally, the risks need to be assessed, both positive and negative, as well as the advantages of each risk being listed. A risk to a business is an event that increases the probability of loss. The most common risks to a business include loss of money, loss of customers, loss of reputation, loss of employees, loss of productive time, and loss of goodwill. The business plan is designed to ensure executives understand the company’s competitive edge and the business risks.
Forecast data is obtained from historical performance, trends, and the company’s future plans and expectations. Historical facts are the number of units delivered by the business during the last 12 to 18 months. Trends are the historical price fluctuations and volume fluctuations of that product.
The company’s future plans consist of how many units will be produced per employee during the coming year. For example, the forecast number of new cars, trucks, buses, and vans to be produced could be based on historical trends, such as past 12-18 month numbers, plus planned changes in quantity per unit.
In calculating the percentage change in revenue a company wants to know what the change will be as compared to the previous year, not simply where exactly the previous year was. In terms of percentage increase to decrease, forecasting is similar except that one needs to know the total units that were produced by the company to determine which of the two was more profitable.
An estimated unit level change may be derived from the net units projected for the 12 to 18 months and the prior year’s expected demand. These units are then converted into revenue, which may be used to make decisions such as buying or not buying a new facility.