Business forecasting software

Before using any business forecasting software, you should have a clear idea about what you will use it for. This will help you to make better choices among forecasting software options.

Forecasting for strategic planning involves more than shopping for software.

People use tools

There are important human aspects to forecasting.

Often a planning assistant presents forecasts to the strategic planning team. These should show two things. Forward estimates about results of current strategies, as a base case. Secondly, estimates of the effects of proposed strategies on corporate performance in coming years.

Managers in may be impatient with the technical details used by planning assistants. On the other hand, unclear instructions from the managers will frustrate the planning assistants. For more on how unhelpful results arise even using when business forecasting software, see Gilliland and Sglavo: Worst practices in Business Forecasting.

Modeling the organization

An aid in this situation is a clear model of the organization. This provides a common language for the participants in the planning process. Such a model can help develop criteria for selecting business forecasting software. A well-constructed company model can also aid the planning team in other things, such as evaluating strategic options.

Be careful how you do this. Giving the job to an outside ‘expert’ may worsen understanding. So can using an off the shelf corporate financial model. I believe the managers should first try to build their own conceptual model of the company value creating logic. The assumptions and logic of a model developed by someone outside the management team may not be very clear to the team members. They may not have sufficient confidence in the model results to use it in a serious way in the strategic planning process. Once having clarified and agreed their own version, they can turn to others for a more technically refined model.

Business forecasting software -
not just pretty pictures!

Many companies make little use of business forecasting software they purchase. They only use the business forecasting software to display data. There may be no interaction with possible scenarios. ‘Management judgment’, with little use of available data can dominate discussions.

Displays of results from business forecasting software can become just ammunition inDeath By Powerpoint.

Start small, start simple

I recommend that the planning team start with a quick simple forecast in the early days of the planning process. Then the planning team should proceed over a few weeks to budget forecasts for say one to three years. Only later, perhaps after a couple of months, start building a full corporate level company model. Use a planning horizon of say 3-5 years.

The model has greater value when used for testing alternative strategies. This comes later on in the strategic planning process. It is less relevant when used for making base case forecasts at the gap analysis stage. A very simple spreadsheet will do at this early stage.

Raising the bar with spreadsheet company models

I admit that using a spreadsheet model has limitations.
For more on these shortcomings see Planning, budgeting and forecasting: Software selection guide.

I do not rule out using simple spreadsheet models for business forecasting and strategic planning. They can be useful in getting to understand your specific organization’s needs. Experience with them can aid in choosing more sophisticated business forecasting software later.

Most managers are familiar with simple spreadsheets. By following best practice, you can build useful models to help inform planning team discussions.

Financial models should depict the logic of how the company creates value for its investors. The business forecasting software should have clear documentation. It should adhere to a set of standards that enables integration with other models in the planning process. It also should be well maintained and easily usable by a variety of users.

The Spreadsheet Standards Review Board (‘SSRB’) shares a set of Best Practice Spreadsheet Modeling Standards (‘Standards’).

You can find software and other resources consistent with these standards at Best Practice Modelling.

The essence of a corporate model for
business forecasting and planning

A model shows how the organization benefits its intended beneficiaries.

In the case of a business, the idea is to calculate profits, cash flows, ratios, stocks, loans, earnings per share, market share, the market size, selling prices. It includes what planners want to know about the company and its environment over the next few years, all in one coherent framework.

This allows you to trace changes in key business value drivers. You can assess the effects of proposed strategies. Using the results it is possible to calculate what effect any new or changed assumption about the future will have on all major aspects of the enterprise.

I recommend the planning team develop a model of this sort. Start with the simplest model possible. Add new items only when they are really needed to provide a full understanding of the company or to answer specific ‘What if . . .?’ questions of strategic importance. Later on a more sophisticated business software package may be found useful. However, I strongly recommend that the planning team start with a manual model, preferably developed in a face to face discussion, using perhaps a printing whiteboard. For example see SMART Board Interactive Whiteboard For Dummies. The team need not make the all the detailed calculations themselves; is easy to ‘program’ an intelligent planning assistant to do them for them and to begin to build the first spreadsheet versions.

Typical questions that such a model can answer are -

  • What will be the effect of inflation at x percent p.a. over the next five years on our company’s cash flow, net current assets, and overdraft?
  • What rate of expansion in turnover can we achieve, assuming that margins remain constant, from our own internal finance, that is, with no new loans?
  • What will happen to profits if turnover and margins either decline or increase by 2 per cent p.a. due to strong competition, and how long will our cash reserves last?
  • Assuming that the bank allows our overdraft to rise and remain at 10 per cent of our capital employed, how much more can we borrow on overdraft by year 5?

Remember when making forecasts that you can be sure that the future will not be smooth sailing! It is more likely to contain jumps and bumps; it is only necessary to glance at any graph showing past trends to see how jerky real life is.

No matter how helpful in keeping track of calculations, business forecasting software still requires managerial judgment to be at work to get the full value from the tool.

Return from Business Forecasting Software to Gap Analysis.

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