The traditional forecasting process looks something like this:
+ historical data
+ basic data that may impact business performance
+ human interpretation, knowledge and experience
= anticipated future demand
But this antiquated process misses the big picture. It doesn’t take overall trends into account, and doesn’t recognize whether historical performance and current data are short-term anomalies or deeper long-term trajectories. When looking three, 12 or even 18 months out, external factors play a big role in business performance, but are often ignored. In turn, inaccurate forecasts are happening all too frequently, resulting in excess inventory, shortages, premiums for storage or rush fees, missed opportunities and ultimately, decreased profits. In fact, our CEO Rich Wagner notes that “we’ve seen that as much as 90% of a company’s performance is affected by external factors.”
With millions of global data sets at our fingertips, we have unprecedented power to see the true factors that are driving business performance. Each company, each brand and each region all likely have different sets of drivers – and now we can pinpoint exactly what those are and how they affect individual businesses. Consumer behavior, real hourly wages, consumer sentiment and personal consumption are common factors that drive many companies’ performance, but there are also hidden influences that aren’t intuitively evident. Now, with the power of big data, cloud computing and predictive analytics, we often find surprises that can help companies improve forecast accuracy and make better plans.
For example, did you know that there is a direct correlation between the Architectural Billings Index and beer sales? No, architects aren’t heavier than average drinkers, working late into the night and drinking up all of the beer. These billing rates precede building and construction, which also correlates to jobs, and therefore, to consumers’ income to buy beer. Looking at architectural billings on a regional level, we can say which areas will be growing and where we can anticipate increased beer sales – after all, you do need a building to take that beer back to.
I was recently on a panel with Cathy Hauslein, senior vice president and chief accounting officer for Mattress Firm, who presented another good example of external factors driving business performance. She particularly noted how the same factor can mean something entirely different in different regions. “When oil and gas prices fell, in some parts of the country that was great. Consumers had more to spend because they were spending less on gasoline. Other parts of the country that are heavy oil and gas markets themselves, we saw consumer sentiment get a little rough and some consumers having less to spend.”
With the power of technology today, enterprises can understand these nuances and use leading indicators to overcome headwinds and make better decisions in all areas of business, including:
- Resource allocation – marketing spend, capital investments, etc.
- Hiring and staffing
- Purchasing and supply chain management
- Forecasting and investor relations
Ultimately, finance executives can benefit from the availability of big data and cloud computing to find those external factors that drive and/or signal future changes in business performance. Companies that rely only on the data that they’ve been looking at for the last five, 10 or 15 years are missing key leading indicators. Bringing external factors together with powerful predictive analytics allows enterprises to make better decisions and avoid challenges and risks – ultimately improving their bottom lines.