FORECASTING: A TOOL FOR

ENSURING BUSINESS GROWTH

NNEW NETWORKING MEETING THE CLUB, SHERATON HOTEL & TOWERS 23RD FEBRUARY, 2008

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WHAT IS FORECASTING ?
To predict (a future condition or occurrence); calculate in advance: e.g.: to forecast a heavy snowfall or rain; to forecast lower interest rates etc. To contrive or plan beforehand; prearrange.

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WHAT IS A BUSINESS FORECAST?

Business forecasting is the process of studying historical performance for the purpose of using the knowledge gained to project future business conditions so that decisions can be made today that will aid in the achievement of established goals.

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BUSINESS FORECASTING
FROM THE DEFINITION, WE CAN SEE 3 TYPES OF SIGHT; Studying historical performance (HINDSIGHTS) To project future business conditions (FORESIGHT) That decisions can be made today for the achievement of established goals (INSIGHT)

BUSINESS FORECASTING

THE GOAL OF A FORECAST IS TO PROVIDE INFORMATION FOR DECISION MAKING

THE PURPOSE IS TO REDUCE THE RANGE OF UNCERTAINTY ABOUT THE FUTURE

BUSINESS FORECASTING

It is a science though not exact, and also to a certain extent an art as well. It is an instinctive exercise in foresight. The focus therefore is "Being less wrong, as consistently as possible and also on on-going review and corrective action to do better next time.

BUSINESS FORECASTING
IT TELLS YOU WHAT YOU EXPECT TO HAPPEN IN THE FUTURE. A FORECAST IS ONE OF THE TOOLS FOR BUSINESS PLANNING. WHEN YOU MAKE A PLAN FOR YOUR BUSINESS, YOU WORK OUT WHAT YOU THINK YOUR SALES, COSTS, PROFIT AND CASH FLOW ARE LIKELY TO BE IN THE FUTURE.

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BUSINESS FORECASTING
A Business person can forecast:

1.How much the business can expect to sell; 2.How much materials are likely to cost; 3.How much cash the business can expect to have; 4.Prices of products so that the business can expect a profit.

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BUSINESS FORECASTING

IS BUSINESS FORECASTING NECESSARY?

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WHY IS IT NECESSARY?
As our society changes at what currently appears to be an accelerating rate, and the need to assess the future grows, the importance of business forecasting increases. To avoid stagnation in your business, you must maintain forward momentum, which means looking forward even as you focus on the present. Forecasting and planning for growth is an exercise in strategic thinking, and it is critical to your continued success.

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USEFUL BUSINESS PLANS

SALES AND COSTS PLAN
This plan helps your business to make a profit. In a sales and costs plan you make a forecast of your sales and costs for each month for the next year. It shows you how much profit you can expect to make next year.

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USEFUL BUSINESS PLANS

A CASH FLOW PLAN
This plan helps you to make sure your business does not run out of cash at any time. Use a cash flow plan to work out in advance how much cash will come into and go out of your business each month.

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HOW TO MAKE A FORECAST

THERE ARE MANY MODELS:
ECONOMETRICS

INPUT OUTPUT
TREND EXTRAPOLATION CONSENSUS METHOD GENIUS FORECASTING SCENARIO The rapid expansion of computer usage in business has greatly increased the feasibility of forecasting by even small businesses. Computer-based forecasting models are becoming the forecasting tool of choice

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HOW TO MAKE A FORECAST

STEP 1 STEP 2 STEP 3 STEP 4

Get information about last year. Analyze the past. Get information about next year. Make the forecast for next year.

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HOW TO MAKE A SALES AND COSTS PLAN

SEVEN STEPS
1 FORECAST INDIRECT COSTS. 2 FORECAST DIRECT MATERIAL COSTS PER ITEM. 3 FORECAST DIRECT LABOUR COSTS PER ITEM 4 FORECAST SALES (THE MOST IMPORTANT PART). 5 CALCULATE TOTAL DIRECT MATERIAL COSTS. 6 CALCULATE DIRECT LABOUR COSTS. 7 COMPLETE YOUR SALES AND COSTS PLAN.

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INDIRECT COSTS

(for each month)

BUSINESSES HAVE MANY DIFFERENT KINDS OF INDIRECT COSTS

EXAMPLES: RENT TRANSPORT STATIONERY ELECTRICITY INDIRECT LABOUR LICENCES INSURANCE MAINTENANCE DEPRECIATION TRAINING

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DIRECT MATERIAL COSTS

(per item)
WHAT ARE THEY? Did you waste materials? Did you get the best price? Can u buy in bulk? Can u get discounts?

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DIRECT LABOUR COSTS

WHAT ARE THEY?

(per item)

Were your employees efficient? Were they fully occupied? Can you reduce the time it takes to make a product? Will you need more workers? Will you need to increase salaries? By how much?

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SALES

(for each month of the year)

THE MOST IMPORTANT PART OF THE SALES AND COSTS PLAN BECAUSE IT BRINGS IN THE MONEY

Analyze using the 4Ps

Did you sell the products your customers wanted?

Which sold well, which did not and why?

Were customers willing to pay your prices? Were your prices high enough to give profit? Is your business location good? How did you promote your products?

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TOTAL DIRECT MATERIAL COSTS

WORK OUT THE TOTAL MATERIAL COSTS FOR EACH MONTH.

FORECAST DIRECT MATERIALS X COST PER ITEM

FORECAST SALES SALES QUANTITY OF EACH PRODUCT PER MONTH =

FORECAST TOTAL DIRECT MATERIAL COSTS PER PRODUCT PER MONTH

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TOTAL DIRECT LABOUR COSTS

FORECAST DIRECT LABOUR COSTS PER ITEM X

FORECAST SALES QUANTITY OF EACH PRODUCT PER MONTH

FORECAST = TOTAL DIRECT LABOUR COSTS PER MONTH

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SALES AND COSTS PLAN

DETAILS JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC TOTAL SALES

DIRECT MATERIAL COSTS

DIRECT LABOUR COSTS GROSS PROFIT

INDIRECT COSTS

NET PROFIT

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EXERCISE I INDIRECT COSTS

Below are records and information for a retail store. Make a forecast of their indirect costs for year 2009 in the table attached. LAST YEAR N Rent last year - 120,000 per annum Electricity 2,500 per month Fuel (petrol) 5,000 per month Depreciation 12,500 per annum Stationery 2, 000 per month 2009 Rent will go up by 20% Electricity remains the same Fuel will increase by 25% Assume straight line depreciation Stationery will increase 50%

What is the total indirect costs?

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EXERCISE 2 DIRECT MATERIAL COSTS

Help a caterer who did not keep records last year to make a forecast of direct material costs for a plate of jollof rice served with a piece each of beef, chicken and moin-moin.

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EXERCISE 3 SALES
Below are records and information for a nursery school. Make a forecast for sales for 2009. The school has 120 pupils enrolled currently. LAST YEAR Tuition Books Meals Swimming 2009

N 40,000 per term } There will be no increase in tuition 18,000 per term } due recent increment but 20% increase in enrolment is anticipated. 15,000 per month 75% of students take school meals. 2,500 per term 80% of students swim. 50% attend after school lessons.

After school -12,500 per term

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FORECAST OF INDIRECT COSTS

DETAIL S JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC TOTAL

RENT

ELECT RICITY

TOTAL

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FORECAST DIRECT MATERIAL COST

DETAILS JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC TOTAL

TOTAL

FORECAST OF TOTAL SALES

DETAILS JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC TOTAL

TOTAL

SALES AND COSTS PLAN

DETAILS JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC TOTAL SALES

DIRECT MATERIAL COSTS

DIRECT LABOUR COSTS GROSS PROFIT

INDIRECT COSTS

NET PROFIT

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BUSINESS FORECASTING
Choose the most suitable period. Divide your plan into months. Make your plans as simple as possible. Make your plan before you need them. Look for information and use it to make your plans.

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CONCLUSION

If you cannot think about the future you cannot have one." John Galsworthy. The future belongs to those who believe in their dreams. Eleanor Roosevelt.

THOSE WHO ARE ABLE TO THINK ABOUT THE FUTURE AND ARE PREPARED TO ACT TODAY IN ORDER TO TAKE ADVANTAGE OF FUTURE OPPORTUNITIES ARE THOSE WHOSE BUSINESS WILL CONTINUE TO GROW.