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Business Forecasting: Key Questions to Ask

    
Author: Nick Goellner

Business Forecasting Key Questions to Ask

In a recent episode of Making Chips, we talked about preparing your family and your business for the potential of a recession. But how do you forecast future growth? What questions should you ask to determine goals and next steps? 

What factors should you consider when forecasting?

Here are some questions to ask yourself and your team: 

  • What can you expect based on your history? This helps you set goals to work toward. If you’ve historically grown by 1% per year, you can’t magically forecast that you’ll grow 50% the next year. It’s not sustainable for most companies.
  • Who were your top 10 customers this year? Can you continue to expect them to be your top clients next year? What percentage of your business are those customers? Will impacts to their business impact you? You have to do some research to find out. This question helps you focus on key account management. 
  • Who are your top 10 targets for new business? This is about creating the next key account. It’s always important to look into the future. Industry highs and lows change and there’s always a new sector and technology emerging.
  • What’s happening in your key markets? If you’re in semiconductors you had a great year. If you’re in aerospace, it’s been a rough year (at least with commercial airlines). Are you getting more business from ancillary markets?
  • What does your open capacity look like? If growth requires certain tooling and machinery, you can’t forecast monster growth if you can’t afford the machinery. If you’re already at capacity and need to expand, it takes time. 
  • What’s happening in your supply chain? If you can’t get something you need due to supply chain issues, you may have to reduce your sales forecast. Or you have to try and source it domestically at a competitive cost (which isn’t always feasible). You can be more aggressive with a forecast if you have more suppliers and aren’t confined to just one. A good distributor might even help you find a temporary alternative. 
  • What’s going on with the economy and local markets? What about geopolitical situations? Do you have good salespeople or are they just floating the waves? A lot of these businesses follow the waves of the economy. The market factors become 50% of your success. The other 50% depends on your skills. 
  • What is your risk quotient? The more aggressive you are, the more risks you’re willing to take. Keep reading to see where you land on the spectrum!

The Miles and Snow Typology of Defender, Prospector, Analyzer, and Reactor

Miles and Snow proposed that firms develop relatively stable patterns of strategic behavior to accomplish an alignment with how they perceive the environment. They divided them into four categories:

  • Defender: A defender concentrates on existing operations and defending their home turf. 
  • Prospector: Companies that extend success through global expansions and finding new markets and new opportunities. 
  • Analyzer: The analyzer takes a middle ground approach, somewhere between a prospector and a defender. They solidify where they’re strong and defend their home turf while seeking out new opportunities where it makes sense. 
  • Reactor: A reactor responds arbitrarily to strategic actions initiated by competitors. What is your competition doing? How do you react to it? 

When Jason started Making Chips, he identified as a prospector. But overall, he identifies as an analyzer—balancing excelling in his home turf and seeking out new opportunities. Cultivating a strong business foundation is important to him. 

Jim is certainly a defender but believes the prospector mindset has become more prevalent in his business strategy over the last four years. 

I’m on the prospector end of the spectrum with my business being middle of the spectrum (analyzer). 

Your aggressiveness strategy has a lot to do with how you forecast. If you’re going to launch 5 new products in new markets then you need to think about that as you forecast. 

Dissecting our different forecasting styles

At Carr Machine & Tool, Jim works with his team to forecast the future of the company. He notes that one person cannot run a company. He needs people to engage and collaborate with and likes to hear what other people’s gut instincts are. It’s about balancing instinct and data. 

Jason points out that the research in the book Humanocrisy shows that the future outlook from the survey of the entire company was always more accurate than the forecast of the smartest CEO at a Fortune 500 company. While taking that into consideration, Jason owns the forecast of his business. 

My Dad used to just throw out a number that felt right. He was always weirdly close to his projection. The negative side of that is that you need buy-in. I have salespeople that need to hit their numbers and they have to believe in the number they’re trying to hit to be fully motivated. So I take a bottom-up, top-down approach. 

I’ll have regional salespeople submit answers to questions and list goals for each of the products that they’re selling in their region. Then I ask them to answer why they chose that number. I implement the same process with my product guys. I’ll look at their capacity, growth strategy, aggressiveness and compare it against what his salespeople projected and adjust accordingly. I normally adjust the number up to a more aggressive stance. They need a challenging yet achievable target. 

What about your business? If you have a great methodology for forecasting, let us know! Shoot us an email at info@MakingChips.com!

 

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