Forecasting is a major challenge when it comes to budgeting, business planning or even valuation. In order for a Company to make future projections it has to have a good grasp of the market, its competitors as well as its own strengths and weaknesses. I have identified the following factors that a company executive can challenge when it comes to forecasting:
- Look at competition: what is their strategy? How can their strategy affect your future performance?
- What is the situation of your commercial agreements (commercial contracts)? In other words, to what extent are your revenues secured? (especially important for retail companies)
- Has your company performed well at forecasting Profit & Loss (P&L) and Balance Sheet items in the past? What were the major reasons for divergence from actual performance? Were the factors causing this divergence systematic or one-off (extraordinary in accounting terms)
- Look at industry reports: Global and national (where your company operates) – What do they say about the sector and its future? Are there any extreme differences between projected performance of the sector and your company? And why?
- Macroeconomic and regulatory factors: Is the economy booming or in a recession? How elastic is the demand of your products/services and will the demand of your products/services be satisfied under these conditions? Are there any laws/regulations that may greatly affect your company in the future?
- Investment community: What is the stock market telling you about the sector you operate in (even if you are not publicly listed)? What is the level of consolidation (M&A activity) that may shape the future of the sector? Are there any rumours for future deals?
- Keep internal record: What about your working capital days? Are they expected to be stable in the future? (this is particularly important when projecting balance sheet items). Are you expecting major changes in your operating expenses, cost of goods sold (COGS) and selling & administrative expenses (SG&A) in the future?
- What is the ability of your company to pay interests on short-term and long-term loans (if any) that may affect your company’s profitability?
These are the main questions yourself and discuss with your colleagues when it comes to forecasting the future performance of your company.