Accurate forecasting is key to corporate survival

Key to survival will be the quick remastering of essential forecasting and budgeting skills that may have been downplayed in the boom years. When a rising tide lifts all boats, it generally matters less if the projections were accurate.

"During the recent times of plenty, forecasting became a pretty routine exercise," says Neil Wolstenholme of Management Consulting Group. "Not enough thought or attention went into forecasting and it was too heavily emphasised on the profit and loss account." Companies paid less attention to operational drivers that impact working capital, capital expenditure, and cash flow, says Wolstenholme.

Even those companies that are still doing well are struggling when it comes to finding new finance. The banks have no stomach for risk and are demanding much more detailed forecasts. But the skills to provide these detailed forecasts have been eroded over time. One of the most common problems Wolstenholme encounters is with companies that are reasonably good at forecasting demand and translating that into top-line revenues, but are not so good at calculating the impact this will have on production costs, inventory levels and trade receivables and payables.

Companies need to spend as much time forecasting costs as well as sales, says Wolstenholme. "Rather than the marketing team sitting in isolation and coming up with their sales forecast, they need to get together with the production guys and those who manage the supply chain," he says. "Then they can come up with a realistic forecast that will allow the most efficient flow of goods onto the market to manage working capital as well as possible and protect the company's cash flow."

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