Forecasting And Multiple Scenario Planning And How To Use Them
Forecasting and Multiple Scenario Plans
Business forecasting is setup to analyze projections over time and hopefully determine a profitable strategy for the future. A business will use forecasting to determine many things, the feasibility of a business model, to determine the potential for success in a given market or to decide if environmental conditions allow business to be conducted. For all these things a forecast may be issued, a forecast that will allow more insight into the feasibility of the company’s ideas. If they are not feasible the forecast will avert a potential disaster. A forecast of an expected budget will be prepared for a startup business with the purpose of securing funds. Why is it important for those outside of a business to view a forecast? The potential success of the business will be more easily seen to potential investors once they are able to see a fore cast of the intended budget vs. the expected income. Since large amounts of real money are being risked, and the investors want a profitable business, forward looking forecasts can be crucial. In order for a successful game plan to be determined the information being used must be accurate and other environmental conditions must be allowed to impact the overall results of the forecast if it is to be dynamic.
Forecasts provide a realistic analysis of the company’s expectations and they give insight as to how healthy an intended business model really is. These forecasts can not only help refine a business plan, but they can identify capital needs and any possible problems with excess spending. When the organization is able to determine a cash flow forecast they will then be able to then look at the anticipated earnings clearly. Many professional forecasters combine a formula of mathematical calculations and their experience to make their projections Overall there are many educated schools of thought and ways of planning forecasts, different people have different formulas and some are closely guarded secrets. Yet no matter how quality the data, how many variables and how sophisticated the formulas are, a forecast is still a somewhat flawed piece of work as it is not able to take into account one important variable- the future. Although we can see a trend and then try to plan according to the trend, there often will be environmental changes that our outside of our control.
Another way of gathering forward looking projections is to use a multiple scenario plan. Scenario planning involves preparing for different possible outcomes as well as any potential changes in the environmental conditions. By going this route we can learn more about potential strategies to take. This planning method looks at different possibilities and compares them on a linear basis, based on what is learned people can take a path that is enabled by more educated research. This is highly desired as it will provide more opportunity to deal quickly with any potential surprises. It also allows more angles to view the challenge at hand, whether it’s a marketing campaign, a new start up business or the hiring of new people.
As the scenarios are being analyzed it’s often desirable to monitor potential negative scenarios as well as the positive scenarios. For this plan to truly be of use one most look at both sides, the negative and the positive. For example, if a company wants to export cars to an African country they may order a forecast to be produced to see the demand and growth of that potential market. This forecast would then be shown to potential investors who would decide if they wanted to put up the money to purchase the automobiles. The forecast would show that there was a percentage of the intended market place who could afford the cars. The market is growing and things seem to be looking good in that area. The investors may go ahead and invest based on this information. However if multiple scenarios were illustrated the investors would see that the potential for disaster is looming. In this country there is a new trade law in the works, this trade law will affect all imports. This new law may be ready to begin taxing a 40% import tax. If the company and its backers invest in the distribution infrastructure of this African country, they begin marketing and hiring the workers for the new market. Then imagine what kind of problems they would have once they export the cars and the trade law is passed. The people in this African country who barely were able to buy the cars previously now would be looking at the cars yet not be able to make a purchase due to the 40% tax that has been added on. This would be one of the scenarios to be analyzed in a professionally assembled plan that would view multiple scenarios. This is a prime example of how the multiple scenario analysis offers a way to uncover any problems.
The same principles that are used in the business world can be applied in our personal lives. There are countless ways in which we need to plan our futures. For example say you have recently been hired for a new job and you need to move across the country. You can make a forecast about how much money you will need to relocate to the new city. The plan is set, after all the research has been prepared, the moving expenses noted, the costs to pay for the new apartment, even the packing materials are factored in to the total estimate. Of course there is no perfect scenario as we don’t know what to expect. But if we make a multifaceted estimate we can cover more possible avenues of risk, thus protecting ourselves from problems and inconvenience. However unless we factor in the potential scenario of things that would occur on a cross country trip we will be unprepared for the journey. If we prepare for the scenario of having a flat tire and hitting a snow storm, if the money and time is accounted for then we will have a greater chance of making it safely and in time for the new job. These are examples of how you can see multiple scenario plans at work in the business world and in our personal lives, to help us mange the normal living challenges we all face everyday.
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