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  • Karl Kielblock

A quality forecast – don’t leave home without one…

The plot may be familiar - your updated forecast is due but there are just so many other pressing issues. In your head it is a quick exercise because all you will do is take the shortfalls from last month and spread them throughout the latter part of the year - much better solution than trying to defend a forecast lower than the commitment you make only two months ago. Fast forward a quarter or two you will be confronted by the inevitable stock build-up and calls from the supply chain manager for your plan to fix the situation. You will come up with a plan which will include some form of a profit obliterating promotion and then spend many hours explaining the “unforeseen market conditions” which lead to this situation.

The advantages of a robust forecast go much further than having the right product or service available that the right time, or not (and half the company off your back). A forecast developed through proper analysis and consideration will provide the foundation for your business to optimise resources and adapt to changing market conditions. Moreover, being able to accurately forecast sales volumes will contribute substantially to accurate financial forecasting. It will give credibility to your team which will in turn create a conducive environment to propose initiatives which will add value to your business. A few years ago, a business partner remarked in a discussion forum: “Your focus should be to make it easier to do business with you. Business conditions are challenging enough, but we spend too much time fixing problems we create ourselves.” This statement covers many aspects of business but is especially true when it comes to forecasting – we are scoring own goals when we cannot meet market demand as because of insufficient planning.

Start with a clean slate. It is crucial to build a forecast on strong fundamentals, yet we often see forecasts that are reverse engineered in line with a ‘number’ the business requires. This does not mean that we should never forecast for aggressive business growth, a good forecast will however quantify the gap from status quo to where you want to be.

The three basic elements required for a forecast:

I. Size of the market or market segment

II. Share of the market of segment

III. Seasonality

I. Market Size

Sometimes trickier than forecasting your own sales can be forecasting the market you compete in. Many businesses use independent forecasts for their specific industry. Others have to rely on their own research and analysis predict where the market is going. Even if you are using a market forecast developed by a third party it can still be valuable to validate with your own views. Herewith a few elements to consider:

a. Historic market trends and the correlation of key macro-economic indicators to the market’s performance. What was the impact of changes for instance inflation, exchange rates and interest rates on this market and what was the lag effect?

b. Potential new market entrants or innovations which could grow the market e.g. online sales and distribution channels making products more accessible.

c. General economic and industry outlook consensus. Taking note of local and global expert views and the company performance of key players can give important insights on market movements.

II. Market Share

a. The starting point is of course the current market share. It is however important to factor in any out of the ordinary circumstances which could have led to a higher or lower market share. For instance, if your main competitor had a supply problem for a few months and which resulted in either more sales of your product or a decline in the market (also to be taken into account in the market or segment forecast) - both of course leading to an increase in you market share.

b. How does your product value proposition compare relative to your key competitors? Is your product range reaching the end of its lifecycle and at risk of losing share, or are you planning to launch new innovations which will give you potential to conquest sales from competitors?

c. Do you have specific activities lined up to conquest share from competitors and how much incremental sales do you expect? For instance, a promotion plan which will aim to improve awareness and consideration of your product and effectively highlight unique selling points possibly not fully appreciated by your target market. Remember that not every advertising will lead to share growth. You could increase awareness and/or leads generated, but conversion is not a given.

d. Spend time gathering marketing intelligence on a regular basis and estimate the potential impact on your market share. Not only will this contribute to a more accurate forecast but will also give you the opportunity to plan countermeasure activities timeously.

e. Share movement can happen instantaneously or build-up over a period of time depending on the product category. This needs to be taken into account when phasing share movement, especially in product or service categories where buying process takes longer and/or the value of the purchase is high.

III. Seasonality:

a. Historic market demand trends by month, season or quarter.

b. Especially in some retail environments - the monthly number selling days and holidays for the coming period under consideration.

c. Events which could directly or indirectly impact the market such as government elections and buying cycles of large customers.

A few more thoughts and best practices:

• Continuously improve and enhance your technical skills including excel proficiency and basic statistical methodology. Preparing and analysing large sets of data accurately and efficiently will improve the quality of your output and give you time to drill deeper to understand and highlight trends. Being comfortable working with pivot tables and formulas in excel such lookups, sumifs, countifs will make your life much easier and free up time to interpret results. In addition, a clear understanding and application of statistical concepts such as moving averages, correlation coefficient and regression analysis can add robustness to your forecast. Building yourself a template which can be updated periodically with the latest data will save you from repeating the whole process every month. Personally, I always find it very rewarding to learn a new skill or technique and applying it to my job.

Understand and document variances. Your forecast will not always be 100% accurate. For continuous improvement it is imperative that the variances are investigated, analysed and documented. Insights should be reported and included in preparation of subsequent submissions.

Visualisation makes it easy for stakeholders to understand where you’re going. When presenting and ‘selling’ your forecast it can become a tedious process staring at an excel table with hundreds of cells. Simple graphs with a few pertinent bullet points demonstrating not only the current status but your strategy going forward makes an enormous difference. It is in this preparation process you sometimes can crystalise your own thoughts and pick up discrepancies.

Schedule enough time for forecast preparation. A forecast can’t be done in a few minutes in between meetings. Book time well in advance (for instance every 2nd Monday of the month) and make sure you will have all the information available required for analysis. Preferably you should find a time and place where interruption is unlikely.

• When you are done, take a break and then and do a sanity check. This is important in many aspects of business but especially applicable when dealing with numbers where the impact of a small mistake can have major downside. A good way to do this is to build checks into your calculation which will highlight potential errors – for instance when there is a high variance compared to a prior period. It can also be helpful to ask for input from a team member as they might pick up something obvious you did not notice and ask question you did not think of.

Karl Kielblock

Consultant – Flux Marketing Projects


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