Business forecasting is no science but preparing for the worst is critical
A general weakness in business forecasting is likely to worsen as the world’s economy becomes more volatile
Hands up those finance chiefs who saw the credit crunch coming. It’s easy to be wise after the event, but not many identified the warning signs before it happened. The few who did – like David Drillock, CFO at the US’s Cytec Industries – were able to take action which enabled them to weather the storm and emerge stronger after it. (Drillock launched a working capital improvement programme which strengthened the company during the recession.)
But most CFOs’ failure to foretell the true severity of the credit crunch highlights a broader problem: a general weakness in much business forecasting. It’s a weakness which is likely to become worse as the world’s economy becomes more volatile and prone to shocks.
There are two reasons why CFOs aren’t always on top of economic forecasting. The first is that it’s not always clear where the function should reside in the company. Sometimes it’s confusingly split between functions – such as marketing, sales, finance and strategy. The second reason is that some CFOs tend to push it to the back of the queue behind seemingly more pressing issues such as chasing cashflow or schmoozing investors.
In fact, there’s a third reason why forecasting isn’t always done as well as it should be. There’s a confusing wealth of data out there and it takes time to identify and collate it. But just as a company should have key performance indicators which measure its internal performance, it should also identify and monitor key external indicators that might impact on its future business success.
In turbulent times, economic forecasting - of issues such as market growth, inflation, currency trends and many other variables - becomes even more important for business planning. But not all companies - especially medium-sized operations - can afford the expensive services of specialised economics consultancies. Besides, as George Bernard Shaw observed, if you lay all economists end to end, they wouldn't reach a conclusion. So, perhaps, it's best for finance directors to do some or all of their own economic forecasting. Which raises the question: where do you find reliable data for free? Here is a quick guide to some of the most useful and reliable sources of free forecasting data.
The obvious starting point is the Office for National Statistics (ONS). You’ll find regularly updated data on issues such as inflation, employment, average weekly earnings, and retail sales. The ONS publishes a wealth of data under 11 themes (they include business and energy, travel and transport and labour market) as well as two “cross-cutting topics” – equality and diversity, and migration.
Time spent digging deep on the ONS site repays dividends – for example, with a detailed statistical guide to capital replacement costs based on indices for revaluation of assets and stocks.
The home page on the Bank of England’s website provides a quick link to its statistical output. Many of these are of specialised interest to the banking industry. But there are also up-to-date stats on issues such as GDP growth and housing equity withdrawal, both of which have an impact on consumer spending.
One of the most important of the Bank’s regular outputs is its inflation report which is usually widely reported. However, CFOs may want to read the full report, shorn of editorial writers’ interpretations, on the Bank’s website, and make up their own minds.
HM Treasury’s website is where statistics meet politics. The “UK economy” section of the Treasury’s website provides access to key documents on UK monetary policy and International Monetary Fund reports on the UK economy. Needless to say, because the IMF’s view on prospects for the UK economy is not ostensibly polluted by party politics, it may provide a more reliable pointer on occasion that the Treasury’s own forecasts, especially on issues such as growth or inflation.
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