HOW TO FORECAST THE FUTURE IN DECISION-MAKING
Decision-making rests on predicting the future and assuming that events will unfold following an established action plan. Develop methods of improving the accuracy of your own forecast and ways of using forecasts made by others to the best effect.
Selecting Methods of Forecasting
Most forecasting is based on extrapolation of figures. For example, when budgeting, you will look back at the costs and the sales of the previous year, and base the estimates of the next year’s sales and costs on the increases and decreases that you anticipate. This method of forecasting is also used as the basis for longer-term planning.
As a more dynamic alternative, work back from the future: envisage your desired outcome, then plan the action required to achieve it. This is an exercise in creating rather than merely predicting, the future, and is the key to making progressive, proactive actions.
Taking a Wider View
When making a forecast, you need to consider criteria both internally, within your operation, and externally, and externally, in the outside market. For example, if you are proposing a full-scale programme to develop a new product, you should forecast the following:
|INTERNAL CONSIDERATIONS||EXTERNAL CONSIDERATIONS|
|Financial – how will you raise the cash?||Customers – where is the market?|
|Structural-where will the operation be based?||Market – how strong will the market be at the launch date?|
|Staff – who will manage the operation?||Competitors – how will they react?|
|Development – how long will this take?||Promotion – what will be required and how much will it cost?|
|Timing – at what time of the year will the product be launched?||Investors – -will you need more money?|
The most important element in forecasting is judgment. Use your experience and intuition to estimate the value of predictions. Ask “what if” questions – “what happens if the sales forecast is raised by 50 per cent?” – and treat the forecast as dynamic, updating it as information comes in. For example, revise your annual budget in the light of performance over the first quarter. In this way, forecasting becomes a flexible tool for controlling, monitoring, and planning the future.
The future rarely imitates the past exactly, some degree of error is inevitable when making forecasts. Refine your forecast using “probability theory” to reduce the element of error. Assess the likelihood of an event occurring on a scale of 0 (“no chance”) to 1 (certain”), with a 50 per cent chance of success scoring 0.5.
A company selling its products at premium prices was hit by the introduction of low-priced competition. Forecasts confirmed that this trend would continue in a market showing strong growth. Extrapolating figures from its own results showed that the company would lose its market share and profit over a very short period of time.
The chief executive decided to look for a future in which the company becomes so competitive on costs and prices that it would treble its market share within four years. To achieve this, the company planned rise in production and sales figures. Working back from that high ambition, the strategists worked out the forecasts and targets for costs, margins, production and the introduction of new products. With careful targeting, the chief executive’s vision of a trebled market share was realized two years ahead of schedule.
Questions to Ask Yourself
- Am I aware of all the variables and alternatives involved in making this forecast?
- Can I assess the likelihood of each possible outcome of my forecast?
- Have I built any margin for error into my forecasting and, if so, is it realistic?
- Am I making a rational assessment of all the possibilities?
- Have I forgotten to include anything major that will have a serious effect on the forecast?
- Consider all the criteria involved in making a decision before committing.
- Check forecasts by your own intuition and experience.
- \Make the future happens – this is the most effective way of forecasting.
- Question every assumption before making your forecast – and then check them again.