Why Forecasting is the single most expansive business function

With the end of quarter rush and pressure to hit your numbers, or the various other deadlines that come up, it’s often very easy to look at forecasting as an after-thought. “We hit our target for the quarter, so what’s the big deal if our forecast was off?” This is not an uncommon sentiment to have, however forecasting is such a critical and central function that connects all ends of the business. In working with various enterprise companies or with start-ups, I have found that strong forecast accuracy is the cornerstone of a successfully managed business.

Variability to Clarity

How much revenue the organization will make is by and large the single most variable aspect of any business. Not having any visibility to this is like driving a car with a busted speedometer. How far are we going and how long will it take to get to our destination? While companies have targets, it’s also important to track progress towards those goals.

For established companies, forecasting is usually set as a high priority function, and a best practice followed at the leadership level. Though at times that priority may not resonate with the operating roles and management — successful organizations have learned to instill that relevance and rigor in process across all ranks of an organization. For small businesses and especially start-ups, forecasting takes a backseat and the focus is often on building the product and taking it to market as soon as possible. However, one of the top-most reasons start-ups fail is because they run out of money — the best way to plan ahead is to have early visibility into the numbers.

Invest confidently

There is an art and science in business decision making. Should we invest ahead and hire the additional headcount, which will grow our products and revenue? Or should we wait until we receive further revenue before we hire ahead? There is no exact right or wrong answer here — situational nuances (based on product maturity and market receptivity) and personal investment philosophies heavily influence that decision. However an accurate forecast can bring objectivity and highlight the possible outcomes with potential level of risk — it acts as a headlight that illuminates the road ahead and potential pitfalls to steer clear of.

Manage the Business

Yes, forecasting is about providing visibility and guidance for the longer-term decisions, however the process extends to various other aspects of managing a book of business, a team, or even systems. It first serves as a systemic audit process for the fundamental datasets utilized to forecast (which are often also utilized for reporting and various analytics needs). Then the process also provides early performance indicators, and a means to adjusting tactics or targets / expectations. For mitigating any risks, the earlier the visibility, the more leeway there is to creating resolution!

Lastly for any businesses that require inventory management, the forecasting process enables the right level of procurement. Especially in cash-strapped start-ups where the inventory can be wasted if not utilized on time, forecast accuracy can help plan to ensure there is enough to meet the demand without wasting supplies and losing out cash or opportunistic costs.

Mark of a True Leader

So how does forecasting separate the leader from the doers? The underlying trait of a leader is someone who can see the larger vision, and drive more concrete steps towards achieving that vision. A leader is someone who understands how their work and accomplishments fit in with the broader purpose or scope. Not just focused on their own targets and checking off their tasks from the list, but also relaying their progress and how it fits in with the larger progress — and vice-versa. Now that we understand the various benefits forecasting offers, a true leader would equally prioritize their business forecast in line with their goals!

Invest in Forecasting

Based on the phase and type of company, the forecast process, methodology, and rigor can and should vary. For a fully established business model, the forecast accuracy should be spot on! However, while a business is starting up, the forecast accuracy should be an integral part of the business, as it will also influence the data collection process. While the forecast accuracy may not be as accurate for a new business (as it would for a fully proven business model), working towards this metric sets a structure to grow and evolve the business. Invest in forecasting today to set your business up to succeed!