Forecasting in all things is a delicate balance between what we know and what we can learn, and it is used to guide us and help us plan in both life and in business. There are some elements that are common to all forms of forecasting and the similarities might surprise you.
Let’s begin looking at modern weather forecasting. It uses a combination of technology and computer models with human input in the form of observation and knowledge of trends and patterns. But there are a number of variables such as wind direction and temperatures that are so variable that it can make forecasting past a certain point impractical and increasingly inaccurate and the ability to acknowledge that, and remain flexible and agile in your ability to recognise and respond to it can make a big difference to the outcome.
Financial forecasting is no different. Using the right technology and software will go a long way to helping you accurately forecast the financial future of your business. But just as with weather forecasting, there is a definite need for the human element that can keep track of ever shifting variables in their environment that no computer can be aware of.
New competition entering the market, a decline in interest from customers in certain products or ranges, what elements occurred in this year that are highly unusual and do not lend themselves to helping to calculate what will occur in the coming year – these are things that only your staff can answer and taking this information into account will make your forecasts far more reliable. Ensuring your software allows for ongoing adjustments for unexpected variables will further increase the validity of your information.
Accurately forecasting the weather becomes increasingly important when you consider the many ways in which it affects our lives. Farmers use the predictions to plan for the planting and harvesting of their crops which directly affects our food chain and further along affects trading and the economy. Airports use local and to a degree international forecasts to safely schedule flights and flight paths. Towns and cities use it to keep track of major weather events from earthquakes to tsunamis to hail storms to droughts, using the information to keep all of us safe and protected from the worst possibilities. On a day to day basis, we use it to choose what we are going to wear and what activities we will do.
An accurate financial forecast will allow you to properly plan for most aspects of your business. The information will affect the number of staff you can hire or may need to let go; it will tell you if you can invest in new products or technologies or if you are going to need loans from others to cover your day to day expenses; it can help to predict your expected cash flow amounts or identify your risks to allow you to better manage them should they arise; it can tell you whether you are looking at business expansion or having to shut down one of your branches.
From daily decisions to long term strategies, accurate forecasting can make your life and your business more manageable. It can never be the only tool you use, but if you utilise your resources properly and allow for the possibility of change and continued input, it can form a strong basis from which to build.