Learning how to forecast accurately can spell the difference between a business's growth and stagnation
Even in his company's earliest days, Alan Burkhard prepared a forecast of yearly revenues and expenditures. "I was proud of myself for doing it because well-managed companies were supposted to," recalls the chief executive of The Placers Inc., a temporary-personnel and job-search firm based in Wilmington, Del. "It was only after five or six years of doing it that I realized our forecasts never worked out."
So Burkhard decided a redesign of his company's budgeting and forecasting procedure was in order. "The secret was freeing myself from my old assumption that next year's forecasts should simply be tied to last year's results plus some factor of growth," he explains.
In addition to revamping the way the company does budgeting and forecasting, he now uses them as a tool to achieve bottom-line results. "At the end of each year, we aim to be exactly where we forecasted we'd be in terms of sales and profits. What the hell's the point of planning if you don't use it to get results?"
It's time-consuming for a company to develop meaningful forecasts. At The Placers, the forecasting process runs from mid-October to mid-December, and every employee participates. Here are the steps involved:
* The preplanning session. The Placers kicks off its forecasting process with an all-day meeting of Burkhard and his senior management team. Their discussion is organized primarily around two subjects: what Burkhard calls key issues (matters like The Placers' strengths, weaknesses, and recent accomplishments; and current market trends and concerns) and key components (internal matters relating to competitive developments, marketing activities, advertising, public relations, staffing, pricing, systems, and the like).
The objective of the discussion is clear: to set the overall tone and context that will guide the forecasting process. During this past October's preplanning session, for instance, management might have seen a need to curtail corporate expenditures because of the economic downturn. Instead, the managers agreed that since the company's corporate clients often replaced laid-off workers with office temporaries, they could cautiously project continued sales growth for the company in 1991.
* The leadership session. Once Burkhard's top managers decide upon their overall forecasting approach, The Placers' executive vice-president of operations meets at the end of October with the company's "leadership" team, the 12 employees who supervise offices or departments. These people will generate actual numbers about projected sales and expenditures, based on the data collected by their own staffs. Since the supervisors will be compiling a highly specific list of numbers -- which include monthly sales projections by client and a breakdown of every type of department expenditure -- Burkhard believes it's essential to train department heads to know what information their employees will gather, how they'll gather it, and why it's important.
* The research process. During November, in addition to regular job activities, all employees participate in the forecasting process. They are guided by worksheets listing every number each department will be expected to generate. For example, salespeople in the office-temporaries division must complete current-client-sales worksheets and expected-client-sales worksheets, which project on a monthly basis how many temporaries will be placed at each location and for how many hours, what billing rates will be on each placement, and what the prospects are for price-level upgrades. Burkhard wants real-life numbers, so his salespeople telephone their major clients to gauge their anticipated personnel needs.
Employees in every department project their operating expenses for the upcoming year in a similarly detailed fashion. "I want them to project the cost of every line item they have some control over, whether it's advertising expenditures, client entertainment, staff training, or whatever," explains Burkhard. Every department head also comes up with a wish list of anticipated capital expenditures that may make it into the final budget.
* The collation of results. By the middle of November department heads collect each employee's projections and submit an overall forecast that is a compilation of the various worksheets. The information is then logged by department into the computer by the accounting department over a two-week period. Burkhard and his management team analyze the resulting first draft. "We may suggest changes if it seems that one department was overly conservative in its projections of sales growth or if business conditions have changed sufficiently since October to warrant it." When management suggests changes, Burkhard's executive vice-president contacts relevant department heads to "negotiate," as the CEO puts it, "a set of compromise numbers that we all feel satisfied with."
* The final forecast. By the end of December the first draft has been massaged into a final version, which is circulated to every employee right after New Year's. Then, on a weekly basis, the accounting department sends all salespeople updates comparing their forecasted sales goals (on a weekly, quarterly, and year-to-date basis) with actual results. Every employee receives similar updates each month that compare forecasted expenditures, by line item, with actual expenditures. "We tell people we expect them to stay on target. And if they're not meeting their forecasted numbers, they've got to figure out why not, how they can adjust their performance, and whether variances represent problems for the business."
Despite recessionary warnings as the company recently wrapped up its forecasting process, Burkhard remained upbeat. "When times are tough, there are greater opportunities than ever for a well-run company, because we can capitalize on the weaknesses of our competitors. The key is keeping our attention focused on the goals we've set through our budgeting and forecasting process."
A CLEAR FORECAST
How to make meaningful budgets
Unrealistic budgets and forecasts are not worth the paper they're printed on. Here's how to make them meaningful:
* Set basic assumptions with management. During recessionary times, it's particularly important to be able to predict how market conditions and economic trends will affect your business. Involve top managers and your financial advisers in the discussions.
* Start early. Spend at least a month collecting specific data about projected sales and expenditures from every department. Then leave yourself another two to four weeks to analyze results and draw up a final report.
* Circulate results. To achieve your forecasted goals, you should keep employees up-to-date on how closely their results match their projections. Every two to four weeks, circulate easy-to-understand reports.