Journey of a Serial Entrepreneur

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How to get from where you are to where you want to be

Forecasting

Champions know that success is inevitable; that there is no such thing as failure, only feedback. They know that the best way to forecast the future is to create it.Michael J. Gelb

Forecasting and inventory management are intricately related. Any mistakes made by forecasting incorrectly will impact directly on the level of inventory at the end of a financial period. It is therefore critical that management spend time and effort in forecasting market demand as accurately as possible to avoid difficult situations in the future. Forecasting is a very tricky exercise, especially for entrepreneurs who are introducing new products or services into the market. Many a time this uncertainty is used as an excuse to overlook market data. I have been guilty of doing this a couple of times, and if you are running a product based business, the consequences can be quite severe. Listed below are a couple of pointers to help with the revenue forecasting exercise.

1. Market Data: Identify your target segment and the budgets for the problem your business is planning to solve. How is your competition addressing the problem at hand currently? Is there a high switching cost in the industry? At what rate is the target industry growing? How have embedded competitors innovated to get ahead of the competition? Can you find your competitors revenue statistics? What are the industry operating margins?

2. Sales Channels: How will your product/service be marketed and sold to customers? How many sales representatives are going to be allocated? What are individual targets set for each representative? How will each representative be compensated? Do any of the available sales channels vary cyclically?

3. Pipeline Management: How are leads collected and passed to sales representatives? How many collection points does your business have? How many leads can be managed per representative in the pipeline? How long does it take to convert a prospect to a customer? What is the average value of a prospect in the pipeline?

4. Scenario Planning: When creating forecasts it is best to come up with multiple scenarios. This helps develop strategies to manage the best case situation, the expected situation, and the worst case situation. These scenarios take into account certain uncertainties and help devise strategies for measures to be taken half way through the year when things take an abrupt turn.

Collecting this data can be an extremely challenging task. Be careful of information sources used. Forecasts are only as good as the assumptions which they are based on at the end of the day. A tip I use personally is to start looking for very specific statistics before I dive into the research. Lets say I want to know what the total revenue for our target industry is in Asia Pacific during 2007. This helps me narrow my search queries and focuses my attention to relevant information sources. No matter how challenging this process may be, it is far better than making some fatal errors in the future.

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2 Responses

  1. Karen Davis says:

    You will fail in the business world if you have no plan or strategy. Your post has a good info.

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