Forecasting in Today’s Economic Climate

During times marked by turbulent economic events such as the past eighteen months, it is more difficult to forecast where our level of volume and revenues may be heading.

So how does one forecast in such a turbulent time?

Revenues and Items that Follow Revenues

Consider shortening the planning period first then extending it incrementally.   As an example, consider working diligently to understand and forecast next month’s sales, then the next two months, then the next quarter as a whole, then the next six months as a whole until you complete your planning period.  We can manage these activities in ways that are much more granular than times past not only in forecasting but also by working back from the monthly sales forecast and identifying  what  specific actions must occur by each key party to achieve these forecasts.  One can consider what this will require for the next month, the next week and even the next day, then remain engaged relative to these required activities to see that the organization get’s back “on plan” albeit likely from a lower base of revenues.  From this revenue forecast, one can begin to make decisions as to expense control and managing cash flow as we all strive to re-balance ourselves financially.  Working diligently to understand and manage from the short term detail of each of these areas will give your organization an opportunity to get re-balanced sooner than later.

Balance Sheet Considerations and Strategic Direction

While longer term in nature, equally important are the strategic considerations to develop a more intense understanding of how each customer is weathering this storm and targeting for possible increase in sales those that represent stable capacity to pay your accounts receivable timely and reducing exposure to those that could become slower pay and even a loss due to inability to pay their accounts payable.  This is not something that we had to concern ourselves with too much in the past decade.  It is a skill and a methodology that must be redeveloped or developed so that we can better understand our risk and make decisions accordingly.

Keep in mind that there has been and will continue to be surprises of corporate downfalls and by working diligently every day to access these risks, you may be able to act to minimize risks where surprises could otherwise occur at a time that is least affordable. The risk of every customer is going up or it is going down and it is helpful longterm if we try to ascertain which direction each customer is heading and respond accordingly seeking to reduce exposure to one group and expand sales with the other group.  This is easy to say and hard to do but by establishing these strategic directions, one can over time make a positive  impact on the quality and risk of your overall customer base.

Some organizations may be able to afford taking the increased risks that some of these customers pose and be willing to work with them with loosened payment terms during this difficult time.  If so, that is outstanding and admirable.  Hopefully your customers will appreciate your willingness to both expand the working capital levels required to finance the same business and accept the credit risk.  This also could be deemed a   necessary risk compared to loosing sales volume such that operating losses begin to impair capital.

Finding the optimal risk / reward strategy for your organization in these areas will not only serve you well this year but for years to come and can make your organization, through this adversity, stronger than before the downturn.

Best of luck in your future forecasting, improved risk assessment, re-targeting of your customer base and managing your cash flow for the challenging yet macro-economically improving period of the next five quarters ending 2010.