FSN: Tightening your belt? Are you making the most out of your forecasting systems?

Tightening your belt? Are you making the most out of your forecasting systems?

21st April 2008
With media attention turning to the possibility of recession businesses will increasingly look to reduce the size of their cost base. For those with limited experience of a downturn the temptation is to make wholesale cuts across the business, for example a five percent reduction in overheads in every department. But such arbitrary cost cutting rarely fails to deliver a desirable outcome and potentially could be very damaging in the medium to long term. Furthermore, undue emphasis on cost cutting is to miss out on the opportunities for revenue growth and taking market share which inevitably arise when adverse trading conditions put competitors on the back foot. Gary Simon , FSN's managing editor examines how performance management systems can help.

Pragmatically, what can you do when the economy starts to slow down? When the economy starts to slow down, businesses need to take a close look at their profit forecasts and frequent re-forecasting should be high up on the agenda. A balanced approach to assessing business conditions is critical. Too little action leaves a business saddled with costs but taking too much overhead out of the business renders it potentially unable to respond when market conditions take a turn for the better.

Redundancies in particular should be treated with great caution. For many businesses people are certainly their most valuable and expensive asset but people are also expensive to recruit and train. It is therefore important not to over-react to a gentle recession. Theoretically, a swift re-forecast of likely sales demand will quickly identify appropriate resourcing levels but this assumes that that your business plans are integrated and consistent. A resource plan held in the HR department needs to be reflected in operational plans in each functional area and ultimately tied back to financial plans.

But companies whose plans are confined to discrete spreadsheets will find it difficult to respond to an urgent re-forecasting exercise, leaving them exposed to poor decision making. Companies that have invested in appropriate budgeting and planning systems that provide for integrated planning i.e. that link operational and financial forecasts will be much better placed to weather any economic storms.

Assuming that cut backs are necessary is the detail available within the plan to support decision making? Many budgeting, planning and forecasting systems hold only limited and high level information about employees making it difficult to identify individual resources and possible head count reductions.

Engaging with management at the ‘coal face' is even more imperative when businesses experience a down turn since local managers are best positioned to understand trading conditions at the sharp end of the business, for example, deals falling through, number of customers walking through their stores, or pricing resistance. But how well engaged are these managers? The spreadsheet based budget leaves Head Office virtually cut-off from its businesses with little real-time insight into trends and factors affecting performance. On the other hand, those businesses that use web enabled budgeting and planning software can quickly arrange a reforecast and gain up to date intelligence about trading conditions from across the entire business.

In the light of projected performance, decisions can be made in relation to the revenue side of the equation. What products should be promoted? Which products should be discontinued? Which stock items should be held in stock and what should be held on a re-order basis?

A clear understanding of sales demand is obviously high up the agenda but so is an appreciation of product profitability. The latter is not necessarily as straightforward as it seems since many businesses use outdated methods of measuring product profitability based on absorption costing. In these circumstances indirect costs and overheads are apportioned to products on the basis of fairly arbitrary cost drivers, such as number of people in a department or floor space rather than the true activities that give rise to costs. Companies that employ ABC (Activity Based Costing) techniques will have a far better understanding of which products and services to promote.

The same activity based principles apply to the assessment of customer and channel profitability, allowing businesses to quickly assess trade-offs between one sales channel and another or one customer and another.

Business intelligence suites, now a familiar part of overall Enterprise Performance Management (EPM) allow management to pull different strands of the business together. How many of your customers account for 50 percent of your earnings? How many of your products deliver 50 percent of your profits? If you cannot answer these questions on demand then you are probably using the wrong systems.

Budgeting, planning and forecasting systems set within the context of overall performance management are vital when the going gets tough, but the notion that systems alone can steer you out of trouble is misguided. Forecasting in difficult trading conditions needs collaboration and an open management style, unencumbered by remuneration and bonusing systems that discourage an honest assessment of performance.

But good governance without robust systems to match is equally unsatisfactory. The worry is that too many businesses are too heavily reliant on spreadsheets. With many businesses reporting increasing market volatility the ability to respond quickly can make the difference between survival and administration. Now is the time to examine your systems, shore up deficiencies and put performance building blocks in place. In a strong wind even turkeys can fly but when the going gets tougher only those that are well prepared will reach new heights.

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