Strategic Planning: Forecasting with Indicators
When developing a strategic plan, one method of getting a better handle on the future is through extrapolating the past. You can do so by finding a leading indicator that your company’s sales revenue lags.
For example, an appliance service company may find that an increase or decrease in its revenue may lag behind the change in the economic indicator of durable goods manufacturing by ten months. Thus, the company needs to track the indicator monthly as a viable indicator of the direction of its business.
The National Bureau of Economic Research has an extensive listing of economic data. The St. Louis Federal Reserve Bank’s FRED system is also very good and has superb charting capabilities for marco-economic indicators. This information is published regularly and is free to the public.
A few other ideas about indicators you need to understand when projecting or forecasting revenues include the following:
When scanning the future, embrace indicators that don’t seem to fit. Remember that you’re looking through the lens of today to attempt to understand tomorrow. So don’t discount an indicator just because it doesn’t make sense at present.
If you hold a strong opinion about a product or an event, don’t rely on only one piece of information or indicator. Gather additional information so your projections aren’t skewed.
Use the past or your historical perspective to help you connect the dots of the future. However, look back beyond the recent past because, if the recent past was a solid indicator of the future, everyone would get wealthy by relying on the Dow or NASDAQ indexes.
Before moving on, consider establishing an ongoing forecasting program. Update your forecast monthly or quarterly by scanning the economic and competitive landscape and revising your numbers. Accurate and updated forecasts are critical to effectively implementing and monitoring your strategic progress.
Creating financial projections isn’t an easy task, but don’t skip this exercise or you’ll miss an important part of developing a sound strategy.
Undoubtedly, one of your financial goals is to increase your sales and/or profitability. After you’ve completed your projections — even if they’re rough — double-check that your goals match your numbers. The financials tell you which goals to keep and which ones to cut. Keep the goals with a positive story and revise the ones with a negative story.