The components of conducting business are continuously changing. So most, if not every, business uses the forecasting tool to assist in formulating the future result of countless business decisions. Therefore, by making accurate decisions based on important information helps companies prevent losses.
Last class we learned about forecasting. It dawned on me how the company I currently intern for actually uses this instrument. As an accounting intern, I assisted a CFO/CPA in preparing a forecasting budget for this year. The company I currently intern owns dozens of bars across the U.S. Our goal was to get an idea of what the company might expect to earn in the fiscal year. So what we did was take last year expenses, have them remain constant, and then include any new expenses that we might expect to occur. Furthermore, increase sales by 5% from food and liquor plus projected growth, and then subtract the expenses. As a result, we were able to come up with a projected revenue. This tool proved very useful because it allowed our general managers to accurately modify operations in order to secure the greatest profits. We also created a projected cash budget to ensure that the company is able to meet future obligations such as expanding to new locations. Thus, providing us precise figures on how much money will the company need to borrow and how the borrowed funds will be repaid.
Now that I think about it more, I’ve noticed how often and important forecasting is used at my job. For example, every time a new product or service was being considered to be incorporated at our bars, we needed to determine whether it would be successful or not. We would look into certain things such as developing, manufacturing and marketing. From my personal experience interning here, most products/services were rejected. This is why forecasting is so beneficial because it can prevent the company from spending time and money if the product/service were to fail.
I’ve also implemented forecasting in my own personal life outside from work. As a college student, being broke seems to be a problem for most us attending school. Therefore, it almost seems obligatory to look for a job in order to make ends meet. Although I do work, I happen to be very good at managing my money. In fact, I created a projected budget of my own in order to see if I can somehow be able to buy a car. This projected budget I made concluded that it was very well possible for me to get one. But at that very moment, the same question I asked my boss, I began asking myself. Now I would like to as my classmates. How much of any information of a forecast can you reliably depend on?
You can use forecasts to glean a variable picture of what you expect to happen in the future, but by no means should you rely completely on a forecast. I think we have all seen that forecasts usually, barring any big and unexpected event, are partly correct. Take a weather forecast: usually the forecast is relatively accurate, even if the temperature is off by a few degrees or there are more clouds than predicted. In the same way, forecasts in business are most likely at least somewhat correct. If they were really as unreliable as they seem like they can be, forecasting tools wouldn’t be so widely used as they are today.
One of the most popular methods companies use for sales forecasting is trend analysis. This approach is similar to the one you used at your company. Each product’s past sales are observed and analyzed to predict how it will sell in the future. However, some uncertainty is always inherent in forecasting since the actual outcomes have not yet occurred. To improve the accuracy of sales forecasting, companies can account for additional factors as well, instead of just taking an average of previous sales. For instance, irregular events such as earthquakes or a stock market crash can elevate or depress sales during a particular period but does not necessarily reflect how products will sell during the same period in coming years. Also, forecasts must be reviewed regularly to compare how they match up with the actual revenue figures each month.
Forecasting control and similar systems of target setting and rewards have tried to provide that sense of comfort. However, if budgetary control really provided control in today’s fast moving, complex, and turbulent world then companies whose budgetary control systems have been operated rigorously would not get nasty surprises, but they do. Forecasting control stimulates people to suppress uncertainty. They don’t talk about it, don’t think about it, and so don’t manage it as well as they could. This discourages people from participating in risk management and thinking beyond just being controlled and managed. That’s why there is another way of dealing with forecasting problems, which is The beyond Budgeting model, the model is an exciting initiative based on a number of case studies of large organizations that stopped using budgetary control. No such organization has ever lost control of itself. Instead, these organizations have benefited immediately from saving time on budget arguments and reallocating it to more proactive and frequent adaptive planning. Measurement and reward is based on performance compared to similar organizations or business units, and on performance under the conditions that actually transpired, rather than on absolute targets agreed at the start of a financial year.