(281) 652-5947
Email Us
abs Support
Employment Opportunities
GoToAssist

Transform Uncertainty into Confidence: How to Start Forecasting — the Right Way

Forecasting

Learn what forecasting is, the top difficulties with forecasting in our modern world, and how to get started properly.

Every business leader wants to know the future, but we all know that no one can actually predict what is going to occur. Sure, any informed person can make reasonable guesses, but an actual prediction —a confident, accurate determination of a future outcome— is impossible.

Instead, you should focus on forecasting.

This is not to suggest that forecasting is easy; it is very difficult. However, if you want an edge over your competitors and the ability to capitalize on emerging opportunities, forecasting will get you there.

But what is forecasting, and how can you succeed with it? In this article, you will receive a crash course in forecasting, learning everything from its definition and difficulties to understanding how you can use modern technology to set up your forecasts properly.

What Is Forecasting?

Forecasting is the practice of examining hidden trends in the present and viewing them as signals that indicate possible directions for your business.

There are two approaches to forecasting. A more general approach examines potential opportunities in the overall business world, and a more targeted approach examines potential opportunities for your company specifically. In this article, we will focus on the latter.

Effective forecasting requires you to:

  • Make a note of all unexpected outcomes or surprising, repeated events that happen in your business.
  • Extrapolate potential “futures” that could occur if those outcomes or events were to become the norm.
  • Determine which “futures” would be extreme enough to require a strategic shift for your business.
  • Closely track those futures and build regular scenarios that prepare you to capitalize on them.

Of course, your business will have a lot of unexpected outcomes or surprising, repeated events. These are what give so much variety to the task of leading a company. If you note all of them, you will have a lot to track, and you will be tempted to focus on only the most plausible futures.

But professional forecaster Paul Saffo, in his landmark Harvard Business Review article, “Six Rules for Effective Forecasting,” succinctly stated the true goal of forecasting when he said:

In forecasting, you want to know the full range of possibilities, not an illusory and narrow set of certainties. “The goal of forecasting is not to predict the future, but to tell you what you need to know to take meaningful action in the present.”

To do that effectively, you will need to know all the potential futures — even the outliers that have only a 10% chance of occurring.

Top Difficulties with Forecasting

In their insightful article, “How to Assess True Macroeconomic Risk,” global chief and senior economists Philipp Carlsson-Szlezak and Paul Swartz repeatedly pointed out that economics is not a scientific discipline. Although its pundits offer a scientific veneer to all their forecasts to make them seem more like certainties (predictions), the pundits are often wrong. After all, how many times have the experts been sure that we were spiraling straight into a lasting recession in the past few years — and how many times have we done so?

This highlights one of the top difficulties with forecasting:

  • Certain information can lead you to overreact. Forecasting pros warn against falling prey to overreliance on any single, strong piece of information. This can be exceedingly difficult, but as Carlsson-Szlezak and Swartz state, “Shocks and crises pose a real threat, but so does overreaction to them.”

The other difficulties are no less insidious:

  • You do not want to come to any firm conclusions. Be wary of any “truths” you think you may have arrived at. These narrow your scope to a point where confirmation bias can make you overlook essential updates to the data. Instead, come to constant, “weak” conclusions and regularly revise or discard those as new evidence emerges.
  • Forecasting is useless precisely when it is needed most. Sometimes, you cannot make a good forecast. If extreme forces are causing wild swings in your data and it seems that everything is an unexpected outcome or surprising, repeated event, embrace the uncertainty. Make a lot of forecasts so you can visualize your full range of opportunities, but do not waste time generating scenarios until the data has settled a bit. Quantitative futurist Amy Webb got it right when she said, “Strategy without foresight makes companies vulnerable to outside disruptions.”

How to Set Up Your Own Forecasts

So, how do you track all this data at your business and stay ahead of emerging trends? The best way is to leverage modern technology.

Modern ERPs, like Acumatica Cloud ERP, are designed to make it effortless to capture data across your business in real-time, highlight emerging trends, and simplify your process of interacting with that data at any time and from anywhere.

If you are exploring a new ERP, make sure the one you choose supports your forecasting initiatives by giving you:

  • Secure access to un-siloed data that represents every aspect of your organization
  • Flexible, build-your-own dashboards that display custom data and visualizations in real time and also provide easy custom reporting
  • Alerts and notifications that make it simple for you to identify outliers and possible trends
  • Comprehensive drill downs from dashboards and reports, so you can always dig deeper into the data
  • A way to query all your data quickly and easily, such as using an AI chatbot to help you contextualize surprising findings

How to Get Started with Forecasting — the Right Way

Demand is the #1 most important area to forecast for most business leaders. You can limit overstocking and high carrying costs when you understand demand correctly. Each of these frees up cash flow.

Effective demand forecasting (or “demand planning” as it is known in the business) also has a bonus. Since it frees up cash flow, it gives you extra capital to invest in additional emerging opportunities you have forecasted.

But there is a right and wrong (or less efficient) way to approach demand planning. To help you get started right, we have provided a handy, informative solution brief, “Balance Supply and Demand and Optimize Inventory with Strategic Plans and Forecasts.” This white paper explains all the basics you need to know now.

Discover More in the Solution Brief

 

Accounting Business Solutions is a respected accounting and business management software solution provider. We provide experienced sales, consulting, implementation, training and support services for small to medium-sized companies located in south central and southeast Texas. Our portfolio of solutions includes cloud based, hosted and on-premise options.

_____________________

Sources: