Business Administration+PERT/CPM uses
Planning for Uncertainty
The business world deals with uncertainty every day. What to make, when to make, how to market the product and how much labor will be needed are some of the questions that businesses face every day. As someone working with the financials of business, information will need to be supplied to management on what things cost, what things can sell for, overhead cost, marketing cost, and any other financial information that can be used to forecast the running of the business.
As stated in (Planning for Uncertainty, Lamoreaux, 2011) the article “the purpose of forecasting is to get the most realistic picture possible of the future for as far out as a company’s management can look.” As a business, it is known where you are at (or stand) at the present time and goals are made for the future, it is the in-between (how to get there) that needs to be worked out. With rolling forecast, information is prepared for as far out as can been seen and as mentioned in the article, if information is prepared further out than can be seen, this just becomes a math exercise.
As business changes frequently and any change in the business decision takes time, a business needs to look at what was done in the past and use this information to make more informed or productive decisions. A comparison to business changes as stated in (Planning for Uncertainty, Lamoreaux, 2011) the article compared managing a business to navigating a ship as stated “The ship represents your organization’s cost structure. It is configured based on thousands of decisions you’ve made in the past. You’re sailing in this competitive sea, and over time you can change everything, but you can’t do it overnight. The planning process is about how to forecast ‘what do I need to do differently. ” By looking at past decisions and their effects, more informed decisions can be pursued based on forecasting.
Forecasting can be very helpful but there are some common mistakes that can happen. One mistake is demanding the accuracy of the forecast. Forecasting is based on assumptions and over time, conditions will change. If a business puts pressure on management to always meet the forecast, managers most likely will choose a forecast they know they can achieve instead of the optimal choice. Additionally, forecasting should be something used frequently and not a “special event.” Information can be updated frequently to keep on track. Some forecasting models use excessive detail and this supplies more information than needed by management and leads to unnecessary time required to collect the data. A business should set specific details needed and acquire and use those for the forecasting model. One common mistake that can hurt your business is (Planning for Uncertainty, Lamoreaux, 2011) “forecasting should teach you things about your business that you didn’t know before, and that information should be acted on. If you’re not getting actionable data, there’s something wrong with what you’re collecting. If you’re collecting actionable data but not using it to manage your business, there’s a communication problem.” A business wants the information to bring up things to fix and ideas on how to be more profitable.
A rolling forecast is a better tool in business than the standard “budget” that must be adhered too. Some businesses may look at a budgeted item and feel that we should spend that budgeted amount as already in the budget and accounted for. With rolling forecast, information is kept up-to-date and poor cost controls such as unnecessary spending can be eliminated. A standard budget can also be used as a goal to be met for the higher management to receive their compensation. Therefore, managers may choose a lower than possible business strategy to make sure they can meet those expectations to receive their compensation. With rolling forecast, a manager’s compensation (or bonus) could be based off similar accomplishments of like managers in like businesses.