FORECASTING: A TOOL FOR ENSURING BUSINESS GROWTH

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FORECASTING A TOOL FOR ENSURING BUSINESS GROWTH

NNEW NETWORKING MEETING THE CLUB, SHERATON HOTEL
TOWERS 23RD FEBRUARY, 2008
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WHAT IS FORECASTING ?

• To predict (a future condition or occurrence)
  calculate in advance e.g. to forecast a heavy
  snowfall or rain to forecast lower interest
  rates etc.
• To contrive or plan beforehand
• prearrange.

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WHAT IS A BUSINESS FORECAST?

• Business forecasting is the process of studying
  historical performance for the purpose of using
  the knowledge gained to project future business
  conditions so that decisions can be made today
  that will aid in the achievement of established
  goals.

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BUSINESS FORECASTING
FROM THE DEFINITION, WE CAN SEE 3 TYPES OF
SIGHT Studying historical performance
(HINDSIGHTS) To project future business
conditions (FORESIGHT) That decisions can be
made today for the achievement of established
goals (INSIGHT)

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BUSINESS FORECASTING

• THE GOAL OF A FORECAST IS TO PROVIDE INFORMATION
  FOR DECISION MAKING
• THE PURPOSE IS TO REDUCE THE RANGE OF UNCERTAINTY
  ABOUT THE FUTURE

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BUSINESS FORECASTING

• It is a science though not exact, and also to a
  certain extent an art as well.
• It is an instinctive exercise in foresight.
• The focus therefore is "Being less wrong, as
  consistently as possible and also on on-going
  review and corrective action to do better next
  time.

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BUSINESS FORECASTING

• IT TELLS YOU WHAT YOU EXPECT TO
• HAPPEN IN THE FUTURE.
• A FORECAST IS ONE OF THE TOOLS FOR
• BUSINESS PLANNING.
• WHEN YOU MAKE A PLAN FOR YOUR
• BUSINESS, YOU WORK OUT WHAT YOU
• THINK YOUR SALES, COSTS, PROFIT AND
• CASH FLOW ARE LIKELY TO BE IN THE
• FUTURE.

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BUSINESS FORECASTING

• A Business person can forecast
• 1.How much the business can expect
• to sell
• 2.How much materials are likely to
• cost
• 3.How much cash the business can
• expect to have
• 4.Prices of products so that the
• business can expect a profit.

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BUSINESS FORECASTING



IS BUSINESS FORECASTING NECESSARY?
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WHY IS IT NECESSARY?

• As our society changes at what currently appears
  to be an accelerating rate, and the need to
  assess the future grows, the importance of
  business forecasting increases.
• To avoid stagnation in your business, you must
  maintain forward momentum, which means looking
  forward even as you focus on the present.
• Forecasting and planning for growth is an
  exercise in strategic thinking, and it is
  critical to your continued success. 

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USEFUL BUSINESS PLANS

SALES AND COSTS PLAN This plan helps your
business to make a profit. In a sales and costs
plan you make a forecast of your sales and costs
for each month for the next year. It shows you
how much profit you can expect to make next year.
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USEFUL BUSINESS PLANS

A CASH FLOW PLAN This plan helps you to make
sure your business does not run out of cash at
any time. Use a cash flow plan to work out in
advance how much cash will come into and go out
of your business each month.
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HOW TO MAKE A FORECAST
THERE ARE MANY MODELS ECONOMETRICS INPUT
OUTPUT TREND EXTRAPOLATION CONSENSUS
METHOD GENIUS FORECASTING SCENARIO The rapid
expansion of computer usage in business has
greatly increased the feasibility of forecasting
by even small businesses. Computer-based
forecasting models are becoming the forecasting
tool of choice
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HOW TO MAKE A FORECAST

STEP 1 Get information about last year. STEP
2 Analyze the past. STEP 3 Get information
about next year. STEP 4 Make the forecast
for next year.
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HOW TO MAKE A SALES AND COSTS PLAN SEVEN STEPS

• 1 FORECAST INDIRECT COSTS.
• 2 FORECAST DIRECT MATERIAL COSTS PER ITEM.
• 3 FORECAST DIRECT LABOUR COSTS PER ITEM
• 4 FORECAST SALES (THE MOST IMPORTANT PART).
• 5 CALCULATE TOTAL DIRECT MATERIAL COSTS.
• 6 CALCULATE DIRECT LABOUR COSTS.
• 7 COMPLETE YOUR SALES AND COSTS PLAN.

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INDIRECT COSTS (for each month) BUSINESSES HAVE
MANY DIFFERENT KINDS OF INDIRECT COSTS

• EXAMPLES
• RENT LICENCES
  
• TRANSPORT INSURANCE
• STATIONERY MAINTENANCE
• ELECTRICITY DEPRECIATION
• INDIRECT LABOUR TRAINING

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DIRECT MATERIAL COSTS (per item) WHAT ARE
THEY?

Did you waste materials? Did you get the best
price? Can u buy in bulk? Can u get discounts?
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DIRECT LABOUR COSTS (per item)

WHAT ARE THEY?
Were your employees efficient? Were they fully
occupied? Can you reduce the time it takes to
make a product? Will you need more workers? Will
you need to increase salaries? By how much?
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SALES (for each month of the year)
THE MOST IMPORTANT PART OF THE SALES AND COSTS
PLAN BECAUSE IT BRINGS IN THE MONEY
Analyze using the 4Ps Did you sell the products
your customers wanted? Which sold well, which did
not and why? Were customers willing to pay your
prices? Were your prices high enough to give
profit? Is your business location good? How did
you promote your products?
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TOTAL DIRECT MATERIAL COSTS WORK OUT THE TOTAL
MATERIAL COSTS FOR EACH MONTH.

FORECAST FORECAST SALES
FORECAST DIRECT MATERIALS X SALES QUANTITY
TOTAL DIRECT COST PER ITEM
OF EACH PRODUCT MATERIAL COSTS
PER MONTH
PER PRODUCT PER
MONTH
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TOTAL DIRECT LABOUR COSTS

FORECAST DIRECT FORECAST SALES
FORECAST LABOUR COSTS X QUANTITY OF
TOTAL DIRECT PER ITEM
EACH PRODUCT LABOUR COSTS
PER MONTH PER
MONTH
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SALES AND COSTS PLAN

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EXERCISE I INDIRECT COSTS

Below are records and information for a retail
store. Make a forecast of their indirect costs
for year 2009 in the table attached. LAST YEAR

2009 N Rent
last year - 120,000 per annum Rent will go
up by 20 Electricity 2,500 per
month Electricity remains the same Fuel
(petrol) 5,000 per month Fuel will
increase by 25 Depreciation 12,500 per
annum Assume straight line depre-

ciation Stationery 2, 000 per month
Stationery will increase 50 What is the total
indirect costs?
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EXERCISE 2 DIRECT MATERIAL COSTS

Help a caterer who did not keep records last year
to make a forecast of direct material costs for
a plate of jollof rice served with a piece each
of beef, chicken and moin-moin.
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EXERCISE 3 SALES
Below are records and information for a nursery
school. Make a forecast for sales for 2009. The
school has 120 pupils enrolled currently.
LAST YEAR
2009 N
Tuition 40,000 per term There will be
no increase in tuition Books
18,000 per term due recent increment but 20

increase in enrolment is anticipated. Meals
15,000 per month 75 of students take
school meals. Swimming 2,500 per term
80 of students swim. After
school -12,500 per term 50 attend after
school lessons.


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FORECAST OF INDIRECT COSTS

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FORECAST DIRECT MATERIAL COST
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FORECAST OF TOTAL SALES
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SALES AND COSTS PLAN

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BUSINESS FORECASTING
Choose the most suitable period. Divide your
plan into months. Make your plans as simple as
possible. Make your plan before you need
them. Look for information and use it to make
your plans.
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CONCLUSION

• If you cannot think about the future you cannot
  have one." John Galsworthy.
• The future belongs to those who believe in their
  dreams. Eleanor Roosevelt.
• THOSE WHO ARE ABLE TO THINK ABOUT THE FUTURE AND
  ARE PREPARED TO ACT TODAY IN ORDER TO TAKE
  ADVANTAGE OF FUTURE OPPORTUNITIES ARE THOSE WHOSE
  BUSINESS WILL CONTINUE TO GROW.