The Thoughtful Forecaster
Thoughtful forecasting aids in understanding key bets and the odds associated with business success. To be successful in it, one must properly understand financial relationships of an enterprise accept reality and face it, model a base case forecast that incorporates expectations and recognize bias potential. MayTag Corporation in the US gives a broad picture of thoughtful forecasting.
Financial statements give a broad perspective of business performance. It measures costs flow, revenue and profits. Combined with the balance sheet, both give a rich picture of business performance. Financial ratios help in comparing relationship across financial statement line items, their trends are important in modeling a forecast.
Some important financial ratios include; growth rates, this measures revenue growth and can be divided into unit growth () and price growth. Margin ratios capture the percentage of revenue accounted for by profit or not consumed by business costs. Margin ratios are subdivided into gross margin, operating margin and net profit margin. Turn over measures the productivity or efficiency of business assets. It is subdivided into receivable turnover, inventory turnover, PPE turnover, assets turnover, total capital turnover and payable turnover.
Other areas of concern in a successful forecast includes using financial ratios I financial models in order to capture the relationship across financial statement line items preserved over time. Grounding business forecasts in reality of the industry and micro environment recognizes the impact of the business environment on the performance of the business.
The other important factor is modeling a base-case forecast that incorporates expectations for business strategy. This includes reflecting all business aspects in your forecast. The other factor is recognizing the potential for cognitive bias I the forecasting process with two elements in mind, optimism bias and overconfidence bias.
Forecasting is not foretelling, it is an art and science that requires paying attention keenly on key areas of a business, if well done, it can be source of business fortunes and a great future but if lost, it can be a source of business failure
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