Thursday 6 August 2020 12:53 pm EY Talk

How to improve your forecasting in a constantly changing world

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Companies are moving to the next phase of business planning, with one eye on economic recovery and the other on what their business and industry will look like as they emerge from and go beyond the crisis. But the future is a blind spot for many. Prior forecasting methods, based on past customer demand, may no longer work. Previous assumptions must be challenged and, in some cases, prove unreliable.

Failure to adjust forecasting methods to meet changing demand, means that scenario planning for both near-term operations and long-term capital allocation may be fatally flawed.

During an EY webcast earlier this year on forecasting for recovery scenarios, only 9% of participants said they were “very confident” in their company’s ability to forecast demand for products or services. In fact, 35% said they were either “not at all confident” or “not very confident.”

Recovery will be driven by medically defined phases  

The lack of confidence seems justified. Unlike past downturns, the current crisis is both an economic and a medical one. Recent events make it clear that the recovery period will be affected by medically defined phases; a three-year plan could change in three days, based on when and where the spread of the virus slows, when companies can ramp up reopening and, eventually, when there is a long-term solution.

These phases will impact customer demand. To prepare for these changes, forecasting must become a core competency, with an emphasis on analysing data from multiple and sometimes novel sources, to understand not only your customers’ plans, but also the potential change in who your customers are and how you deliver value to them. 

Waiting for the market to return to ‘normal conditions’ could mean that you may miss dynamic changes happening in the market.

Key steps to change how you forecast

Change how you look at your customer  

Customer behaviour and spending potential are changing dynamically across many industries. The key question is – which of those changes will become permanent and how long the temporary changes will last?

When will consumers be willing to travel by air or gather in restaurants or night-clubs in the same numbers they did before? Will businesses be able to continue to pay rent and will companies cut down on office space long-term? Will patients be willing – or able – to go to a hospital for elective surgery?

In the EY webcast poll, 77% said that changes in customer behaviour were the key forecasting risk for their company, significantly more than those who identified liquidity and capital restraints (the next most frequent answer).

Knowing that customers have become even more important as their circumstances and behaviour have massively changed, how should companies adapt?

Change your data  

The information used in the past may have become too static, too imprecise or no longer predictive.

For example, low fuel prices would often encourage increased day trips but that relationship has obviously broken down. Conversely, measures such as international travel restrictions, post-travel quarantine measures or increasing risk in tourism destinations are having an impact on demand for domestic tourism and hospitality.

In some businesses, social media analysis can be used to augment additional data. Outside data on pandemic hot spots, weather data, government regulations, consumer sentiment and other measures are publicly available and in some cases can inform more advanced models to see what can best be used to augment and inform company forecasts. 

Adapting your business to new circumstances will be helped by understanding the external triggers that impact your market.

Identify where the data sits and ‘free’ it  

During our webcast, 44% of participants said access to meaningful and quality data was one of their biggest impediments to timely and accurate forecasting. In some cases the reason is likely that the data they have relied on in the past is not sufficient for the future. But we also know that in some cases, data is difficult to access because it is created and stored in business units, geographies and organisational functions.

Companies need to establish a culture of quickly sharing data across the organisation and put the systems such as centralised dashboards and alerting systems in place. These systems can regularly update the data for the finance and strategic forecasting teams, identify when foundational assumptions may have become questionable and enable key decision makers to make informed choices more quickly.

Focus on forecasting  

In our experience and discussions with mid-market businesses, they feel that they spend more time than they would like preparing financial information and less time than they would like on analysis. That needs to flip in the current environment.

Once a company has defined the necessary data inputs and ways to free that data from organisational silos, they can:

 1. Establish roles, responsibilities and a focus on forecasting

A cross-functional team can establish a process for continuous updating of data and ongoing evaluation of demand and supply shocks. Using a collaborative team approach helps deliver robust, scenario-enabled modelling that is fact-based and supports real-time decision-making.

 2. Ensure systems allow data to be easily refreshed

Initially, pulling in all the necessary data will require a daily or weekly refresh which may be a manual and painstaking exercise at the beginning. As companies free up capital to upgrade to different technology solutions, they can move to automate these process and enable enhanced insight.

 3. Don’t forget the long term

Scenario planning needs to be aligned to capital and investment strategy. Forecasting should look at the balance sheet as well as the profit and loss in an integrated fashion. In addition to monitoring liquidity, there are capital allocation decisions that will help companies thrive after a crisis. Will capital need to be reallocated amongst business units under various recovery scenarios? Will the company have the capital to invest in new technologies or bolt-on acquisitions, while also maintaining or increasing a dividend or share repurchases?

 A robust forecasting program will help you answer these stakeholder and board questions:
• How much of your demand do you expect to come back and when?
• How has customer behaviour changed? 
• How many weeks of cash should you have on hand?
• Do you understand the key risks to your business and how are they being managed?

Author, Tina Gill