Learning the Art of Forecasting

What would you do if you could predict the future? Perhaps you would buy yourself a winning lottery ticket, bet on the victor in a sports game, or avoid making bad decisions?

While no one, yet, has a crystal ball, we can anticipate or forecast patterns with a good level of precision.

In business, forecasting is an important part of any strategy; many companies provide products and services based on predicting trends and what a consumer will need or want. Consider professional traders that make their fortunes investing in the future value of stocks, currencies and commodities. How do they know where the market is going?

Forecasting has always been a critical aspect of our lives, both private and professional. Every time we make a decision, we should consider the different outcomes and how they could shape our future. In every organization, industry and sector, forecasting is key.

Not anticipating where the business is going, where the market is going and where the demand is going to be, could mark the beginning of the end for a business or even an industry.

So how can organizations predict the future?

Like many things in life, forecasting is tricky. Although there are so many variables, there are also some basic concepts and guidelines that can help companies go through this challenging process.

Information is key

To make an educated forecast, it is important to collect as much relevant information as possible. There are three aspects that we need to consider:

1) The information must be accurate and from a reliable source.

2) The way we interpret the information can lead to different outputs.

3) Information alone may be useless unless combined with further data.

Sometimes, we are unsure if the information is right for us until we use it. This is why the art of forecasting is an ongoing process of trial and error. Information can be data, trends, geopolitical events, culture, climate and anything that can affect our business and can help us predict what is most likely going to happen.

However, it should be noted that possessing information does not guarantee an accurate forecast.

Use the past to predict the future

Even Rafiki, the wise baboon from The Lion King, knew that “you can either run from it (the past) or learn from it.” History is an amazing (and reliable) source of information for forecasting, so let’s use it!

If we are unsure of what will happen in 18 months from now, let’s look at what happened in the same period in previous years. Looking at historical trends and patterns works well in the sectors highly affected by seasonality: airlines, rent-a-car, and hospitality, to mention a few.

Let’s remember, forecasting is not only about creating strategies for growth but also about strategies to counter challenges a business may have.

For example, company X is in the car rental industry and is pouring over the previous five years of historical data. The business learns that every year at certain times, some of their locations have a consistently low occupancy of their fleet. This simply implies that at these times, company X will have low demand in some locations, leading to low occupancy. So, what can the company do?

1) They can proactively set very low rates during those specific tough months to stimulate more demand and increase their capacity.

2) They can plan to lower their fleet during those months to reduce costs but not their rates.

Of course, they may have more options and the final decision will also depend on the flexibility they have to make those adjustments. The point is: knowing what most likely will happen gives them enough time to plan an alternative course.

For some industries and companies, forecasting can be more difficult. The historical data might not be as useful or easy to source. In this case, internal collaboration with all departments is important, especially with the commercial department. It is essential to have a great understanding of the pipeline, ongoing contracts and everything that affects the revenue now and in the future.

Forecasting is extremely beneficial and can lead to great results; financially, operationally and commercially. However, we need to be careful about how we use it. Always be realistic. Overvaluing the forecast can seriously damage a company’s financial structure, including overstaffing (or understaffing) and create operational issues.

At Elements Global Services, we have had rapid growth in the last 18 months. Growth is a double-edged sword: it is obviously positive and something that all the companies aim for, but when a company grows, not only the volumes and revenue are affected, but also the complexity increases. The company must be able to forecast its growth so that it is well prepared to handle the challenges that arise, like staffing, processes, logistics and so on. Forecasting has helped us to scale our global presence and operations and maintain the same outstanding service level for our customers globally.

Conclusions:

Remember that forecasting is an ongoing process and requires continual adjustments to see results. The most important things to remember about this process are:

· Information is key to conduct an accurate forecast.

· The past can be your best ally when trying to predict the future.

· Being realistic is more important than being pessimistic or optimistic. Pessimism and optimism are both known to cause challenges for businesses.