Accurate Business Forecasting - Essay Example

Accurate Business Forecasting Accurate Business Forecasting Contents Page Introduction 2 Market analysis and trendforecast 3 Cost, Sales and profitability forecast 5 Financial analysis & prediction of changes 7&8 Underlying economy Conclusion 9 References 10 Introduction 2 Introduction: The paper aims at defining and illustrating the need of an Accurate Business forecast for a Building construction company. Broadly, it will discuss the categories that require forecasting and the ones that are of utmost importance for the success of the company. The paper analyses the aftermath of a poor forecasting and the success of good forecasting. It explains aspects concerning the platform of business operation, the means for executing the operation, and the levels of desired achievement. It details survival methodologies in a changing market and political scenario. It gives a macro outlook towards the key indicators that should be considered before venturing into a business on building construction. It encompasses almost all vital areas of business that play a role for the success and growth of the company. Why is Business forecasting important when we cannot predict the future The answer to the question is to evaluate risks that can arise from every angle and prepare to counter them and reduce damage to business as much as possible. However, there is no forecast that is 100% right. All business forecasters strive to achieve the 99.9%. There is another side to the coin here. Market analysis and Trend Forecast 3 A business ventured with no sense of forecast can be a total failure at a very early stage. In other words forecasting sets goals for a business. The company strives for its goal and carries out its task according to a well-drawn plan based on the forecast. Building construction is an industry, which involves high amount of planning, huge capital, and careful execution .Besides, the business is extremely sensitive to price rise, changes in the macro economy and a change in government regulation. In addition to the above, the industry is also labor intensive. Broadly, the company needs to analyze and accurately forecast the following three factors. Firstly, Market analysis and trend forecast. Secondly, Forecast of the company's top line and bottom line numbers, the so-called targets for growth on quality and quantity. Thirdly, Financial Analysis and the prediction of the underlying changes in the macro economy. Market Analysis and Trend forecast: This is the central nervous system of any construction company. As a start up company, it is very important to select the area of operation or to be precise the exact geography, where they propose to start and speed up business. Estimating the current demand for construction, and what would be the expected demand for future construction and the growth of competition. Market analysis and trend forecast (continued) 4 What will be the expected turn in the market condition in the geography of operation, the availability of land, the expected market potential, and how much of the pie will the company own in the future. 'Pioneer builders' a construction company chose nearly four years ago analyzed the market trend in the state of California and picked San Diego as its base of operation, as it could not afford stiff competition in cities like Los Angeles. The city of San Diego had good potential for future construction especially, a rising demand for residential construction. The company analyzed and focused its target segment and was able to drive sales and reap profits in their first project, based on the market forecast. Soon they acquired land for combined residential construction and the growing demand in the city got them better business. The company had analyzed data of almost six different prospective cities for the growth of their business and has chosen San Diego based on their 'Demand forecast.' The forecast was right and it did deliver the expected results during the first two years of business. The key to this success was the effort the company had taken in acquiring market data and the comparative study with the forecast experts. The result was a list of prospective cities to choose. A simple demand and growth forecast of the markets would form the foundation for a strong and sustained growth. In simple words, the company knows what to expect from this market. Cost Sales and Profitability Forecast 5 Forecasting the market trend gives the company hope for further business as they have a market to sell. After math of Poor Market analysis: The absence of the market trend forecast or the estimate of market potential is ignorance on the possible outcome of the business. It results in a total mismatch between the expected business and the market potential. In addition prove detrimental to the company; The Company will be caught in the wrong market with the wrong target segment. The result will be a wasted effort of time and money. Analysis: Scenario 1: Ascertaining the presence of a strong demand for a product is universal and by far controllable. The markets may not necessarily react in the estimated direction in the long term but the current trend and foreground for the business can be predicted. The trend also provides information on the next best market for sales and makes way for the survival of business. As the factor can be controlled largely by proper analysis, which is internal, the probability of a misfiring in the analysis for demand is few. Cost, Sales and Profitability forecast A company that does not have a vision for growth, and a mission to achieve this growth is as well as dead at the time of inception. The prediction of future sales, cost and the profitability margin is the lifeline of any construction business. Cost Sales and Profitability analysis 6 It must strive to increase sales and market share and cut down on costs both fixed and variable to arrive at a greater profitability margins uncompromising on quality. The size of the business, the expected increase in cost during the turn around time, and the margins they will receive should be clearly forecasted before indulging in the project. The cost parameter, which include both fixed and variable kept flexible with room for spillover. The construction business is one that is also labor intensive and ample measures should be taken to keep labor costs covered. A forecast on the necessary insurance coverage and the expected loss that will incur in case of accidents will save company's image and reputation. This factor is purely management, fine-tuning these, give a more realistic, and a hundred percent achievable forecast. Every company runs for its numbers and so does Pioneer builders. The company gave modest forecast on profits the first two years in fact broke- even at the end of the second year. This break -even time was close to prediction and was comfortable financially with the results. After math of a poor Cost, Sales and profitability forecast: The aftermath of this factor either is an underutilization of resources of an overestimation of profits and sales. This can slow the growth of the company or become a hurdle for progress the following years. Analysis Scenario 2: The above factor is a goal setter for the company and provides direction for the company in other words; it translates the mission and vision of the company in figures. This factor is purely business management and is Financial analysis 7 controlled by the promoters or the board a wrong forecast can be corrected and the probability of its occurrence is not cyclical or repetitive. Financial analysis & Prediction of underlying changes in the macro economy: 'Finance'- A component, which can change everything about the business. A construction business needs a strong financial partner. The business has to be supported with enough amount of finance on a day in and day out basis. It is important that the company foresees financial crisis and warned adequately. A proper gauge of the company's financial credibility at every point eradicates fears of future fund flows. It helps ascertain as to how much of funds need to be borrowed and how the borrowed funds will be paid back. Pioneer builders had checked their credibility through experienced financial experts. The promoters' assets were valued to ascertain the size of their projects at the time of inception. They had sought the advice of the bankers and analyzed their balance sheets at the beginning and end of every project to keep predicting the funds that would be available for the next project. The company meticulously started offsetting funds for re investment, as the practice of forecasting gave them valuable insights for 'Contingency planning' - This fund set aside would aid to bail the company at the time of crisis. A fund that would help marketing activity, or finance a new project under tight financial situations. An advantage they would get at a time of an unexpected downturn in the macro environment. Prediction of changes in the Underlying economy 8 Prediction of changes in the Underlying economy: It is always necessary to predict cyclical changes and know the current stage in the business cycle. It is also necessary for the business to inspect government regulation, current political scenario, the possibilities of change and evaluating the best time for venturing out in business. Forecasting this change can be done by looking at relevant past data. However, the past is not a guide to the future. After math of a poor forecasting of the underlying economy: Ignoring the economy or interest rates for the building construction business can lead to the forecast being a total failure. Right from last year the US economy has given the residential construction industry step motherly treatment. If analyzed closely this was expected after a boom in the economy from 2004. The rise in the interest rates to control inflation was expected. It is just an indicator of how worse things can get given a situation like this. The interest rate is increased only to decrease the demand for borrowing and this industry, which is fully dependant on borrowed money, is sure to weaken. Analysis Scenario 3: If Pioneer builders had ventured in the business in the beginning of 2007 the company would have faced the worst economic condition as the trough phase in the economy had just commenced. The economy is subject the frequent change as it is subject to numerous factors. It is also repetitive in nature. Conclusion 9 The business cycle is also a key influencer. Change in the economy is cyclical and the time and frequency of the occurrence of an economic condition is unpredictable owing to the factors that influence the same. Hence the probability of a wrong forecasting of the economy is higher. Conclusion: If the above-mentioned categories are well forecasted the business is sure to survive. On a general comparison of the three factors: Market forecast, Sales and Profitability forecast are controllable and highly predictable. Market forecast is arrived based on a trend analysis and survey and is based on order of priority. If the company foresees a problem in the current market, it can move to the geography next in line. It also has the option of operating in two geographies simultaneously. Sales, Profitability forecast, and a good business plan based on the market potential can do the magic for the business. Therefore, the first two are highly controllable and precision in forecasting will yield results. The third factor 'financial forecast and predicting changes in the macro economy' - The managing of finance and procurement of financial aid is manageable and the effects of a wrong investment plan can be forecasted and corrected. The uncontrollable and unpredictable factor is the change in the macro economy or government regulation a one, which has the highest probability of occurring. Any upset in one economical factor, can affect the economy as a whole with a change in demand supply factors and a resulting increase or decrease in the interest rate. Nevertheless, a good market forecast and a flexible business plan can sooth damages of an unfavorable economy. References 10 References: Riecks Ron, 2007 July, Construction industry forecast. CIT Construction, Industry forecast 2007, Retrieved on July 17, 2008, www.cit.com Petersen Craig, H. & Lewis Chris, W. (2004) Business and Economic forecasting, Managerial Economics, (5th Ed.). Utah State University: Pearson Education. Bush Melissa, Apr 12, 2007, Why is forecasting important to an organization, Associated Content, Retrieved on July 18, 2008, www.associatedcontent.com Read More