If you absolutely don’t care where your business is going and whether there are some additional opportunities you can benefit from along the way – then this blog is probably not for you.
Forecasting in financial terms is the process of using historical data and market insights to make informed predictions about future trends and results. And it is vital in many ways.
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If you’re still not sure whether your company needs forecasting, here are several reasons why it’s important for your business.
Your Business Decisions Are More Informed
The very core of forecasting always includes two critical aspects of finances – the present state and plans for the future. And since it relies heavily on data, it helps you understand what goes and what doesn’t at a specific market, with a particular product, etc. This is crucial if you’re looking into expanding to new markets, investing in technology or launching a new product.
When Netflix decided to expand its services globally, and this goes especially for emerging markets like India, it relied primarily on forecasting data. They analyzed trends in broadband penetration, smartphone usage, and local content consumption. This allowed them to easily predict where demand for streaming services would grow. The data they used for forecasting helped them determine not just where to expand, but also how. In the end, they focused on mobile-based, lower-cost subscription models tailored to the specific market conditions.
Helps Identify Risks
By looking into the future, forecasting is in fact an important element of risk management. Meaning, that businesses are able to anticipate downturns, operational bottlenecks or other disruptions. Or at least, handle them much easier.
A good example of this point is the case of P&G during the 2008 financial crisis. P&G used forecasting tools to predict shifts in consumer behavior, one specifically – people spent much less money on luxury items. To adapt, P&G focused on essential, everyday products like Tide detergent. This shift allowed them to sustain sales and minimize the negative financial impact during the recession.
Puts Growth Opportunities Under the Spotlight
Another reason why forecasting is important is that it focuses your attention on growth. When you’re able to predict sales trends, demand fluctuations, and customer behavior, it’s easy to capitalize on growth opportunities. And to avoid over-expansion or missed demand.
Starbucks used forecasting precisely in that way. In the early 2000s, the company relied on data from its loyalty programs and sales patterns to forecast demand in different regions. These insights helped them strategically open new stores in locations where they predicted high demand, such as urban areas and international markets like China. The result? By 2019, China had become Starbucks’ second-largest market.
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Facilitates Better Cash Flow Management
Forecasting is a vital tool for managing cash flow, since it helps businesses ensure they have enough liquidity to meet upcoming expenses. Or to make investments and overcome unexpected financial difficulties.
Walmart, one of the largest retailers in the world, uses sophisticated forecasting systems to manage inventory and cash flow. Their demand forecasting tools predict customer purchasing trends, helping the company determine how much inventory to stock at any given time. This ensures that Walmart doesn’t tie up capital in unsold goods, which can block their cash flow. During the pandemic, these forecasting systems allowed Walmart to avoid overstocking or understocking essential items and maintain liquidity while meeting customer demand.
Improves Operational Efficiency
Forecasting is important for increasing operational efficiency within supply chains, simply because it predicts demand, reduces waste, and prevents both overstocking and stockouts. When done right, forecasting allows businesses to streamline their operations, align inventory levels with actual market demand, and optimize resource allocation.
Coca-Cola has leveraged advanced demand forecasting to streamline its supply chain operations. They use real-time data and predictive analytics, and they can forecast consumer demand for their beverages in various markets. For instance, during the summer months when beverage consumption usually increases, Coca-Cola adjusts its production and distribution strategies accordingly. This approach not only improves operational efficiency but also reduces costs associated with excess inventory and stockouts.
Increases Competitive Advantage
Effective forecasting also provides a strategic advantage that can lead to long-term success. Organizations that are great at forecasting can adapt to market changes in no time, seize growing opportunities, and outperform rivals, especially if we’re talking about a dynamic industry.
A company very much known for its detailed demand forecasting and supply chain management is Apple. These processes play a crucial role in maintaining the company’s competitive advantage in the tech industry. By accurately predicting consumer demand for new products, Apple can optimize its inventory levels and ensure product launches that hit the spot at the exact right moment. For instance, when launching the iPhone, Apple uses historical sales data and market trends to forecast demand and manage its supply chain effectively. In this way they meet consumer expectations perfectly and minimize wait times.
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Enables Scenario Planning
Last, but not the least answer to why forecasting is important – it enables businesses to prepare for various “what if” scenarios. This makes businesses more agile, allowing them to respond quicker to unexpected events, such as economic shifts, competitor actions, or regulatory changes. This is a very proactive approach to planning and it helps organizations maintain stability and profit even during turbulent times.
Ford uses forecasting and scenario planning to remain competitive in the automotive industry. In 2020, the company (like many others) faced unseen challenges due to the pandemic and rapidly changing consumer preferences. Ford implemented scenario planning to assess various market conditions, including shifts toward electric vehicles and changing supply chain dynamics. By simulating different scenarios, Ford was able to make informed decisions regarding investments in electric vehicle technology and production capabilities, positioning itself as a leader in the evolving market.
Conclusion
Turbulent times and industries call for turbulent measures. If you’re working in a dynamic field with a lot of opportunities, fluctuations, rivals, etc. then a good forecasting model should be at your core. It’s a tool that keeps you on your feet, ready to fight any challenge that comes your way. And though it requires a lot of dedication and precision, the gains you’re getting in the end are way bigger than the effort.
