With many companies finding themselves under-prepared for the rigours of a downturn, they have turned to often poorly structured forecasts on which to make key business decisions about future direction.
For many companies that suffered at the hands of the recession forecasting was a disparate set of spreadsheets spread across multiple business disciplines. These spreadsheets took weeks or even months to properly consolidate and even then were often driven from systems poorly geared up to reactive reporting.
As the financial crisis hit, these companies frantically tried to uncover where their problems lay. But with no clear view or understanding of how and why the problems were occurring, they were unable to react quickly enough to rectify them.
In good times this was affordable, in bad times it proved devastating. In many cases critical information within businesses was being retained in ‘silos’ or ‘islands of data’. This meant that many decisions were being made based on inaccurate and out of date information in an economic environment that was changing almost daily.
Another major contributing factor was companies’ willingness to buy contracts, bringing work in to the business at zero, or even a negative margin. This is a high risk strategy at the best of times, but even more so when there is no means of balancing it against a clear and accurate forecast of how it will impact the business as a whole.
Getting this wrong has led to some of the UK industry’s most spectacular collapses, with the loss of many jobs and the net effect on the economy as a whole. Examples such as Connaught and Optica show how over exposure to debt is often the result of poor risk assessment when entering into deals, including over-competitive bidding practices and poor understanding of the cashflow associated with critical projects.
All in all, there were many contributing factors to the economic downturn and the chaos it caused in the construction and contracting industries. Clear forecasting alone may not have been enough to save all businesses from the adverse effects of the recession, but there are many ways in which it could have helped.
To appreciate how forecasting can help, it is important to understand what forecasting truly means and how the processes can be practically implemented to provide tangible results for organisations:
- Visibility – The ability to look into and across your business, accessing any component of a project and analysing its positives and negatives based on real-time data, highlighting where potential problems may lie and being able to take corrective action.
- Risk Analysis – With better visibility of your business position, decisions made can be analysed, prioritised and dealt with based on their respective risks. This allows costs to be balanced against forecast revenue and plans to be formulated that address the potential risks that may lie ahead.
- Profitability – With accurate information and balanced risk, forecasting allows you to control how and when you take profit from the business, balancing it against project and divisional contingency planning.
In order to understand what a forecast is telling you it is essential that you understand the trends underlying your business sector. How are material prices likely to fluctuate? Where are the next phases of investment in private or public sectors likely to come from?
Understanding the business likely to come through the door is fundamental to a forecast. It’s not just about the project itself, but the impact of all projects as a whole on the business in general. It is about understanding how and when payments will be received and the cost expenditure required to meet client requirements, both pre- and post- contract.
Islands of data can be as much about people as they are about systems. Training your users and helping them to understand that everything they do can help to protect your company is critical. Ownership of data is essential; however this is not to be confused with keeping it in isolation, hidden from view until it can be presented in a more favourable light to management teams.
An absolutely fundamental component for successful forecasting, business information is about transforming static data entered into a core business system into a meaningful set of results that can uncover not just the key performance of the business but historic trends that can be used to balance forecasts.
It is up to industry to adopt these tools and place them at the centre of their forecasting strategies. Only by working together can robust, industry-specific frameworks be built, opening clear paths to accurate decision-making through instant, on demand forecasting capabilities.
These lean times, when lots of construction companies and contractors are running at a reduced capacity, offer a perfect opportunity to review and analyse current systems, not just software but business processes as well.
Take the chance to ask whether your systems are fit for purpose and when the upturn comes, will they ensure that your business is able to cope with the increases in demand without having to substantially increase human resources to cope with it?
In the simplest terms forecasting is all about managing cashflow. The old adage “turnover is vanity, profit is sanity, cashflow is king” has never been more pertinent than today. Having the correct commercial & financial business management system in place as the central hub of a wider forecasting strategy will go a long way to ensuring you maintain control of your cashflow and business at all times.