Accurately predicting the future through the strategic application of external factors to improve forecast accuracy has the potential to add more value than any other single business planning activity.
Companies that get their prediction engine correct have at least the possibility of getting everything else working smoothly, from finance and marketing to their supply chains. Absent an accurate prediction for planning, however, everything a company does will be reactive as opposed to proactive planning.
Since the advent of business intelligence solutions, the primary task has been to analyze historical economic data to help leaders make smarter decisions. This would work fine if history repeated itself and nothing outside of the company changed. In the current global environment, the stakes are too high to take this risk. A company that can predict accurately is nimble and able to take advantage of the opportunities presented to it.
In a recent Executive Survey report, over 60% feel that incorporating external factors will result in significant improvement to financial forecasting. In fact, 90% of respondents feel that external data will provide an overall performance improvement.
The market value of companies that evolve their business intelligence capabilities to accurately predict the future is two to three times higher than those that do not.
Top External Factors Beyond an Organization’s Four Walls
Companies may not ever gain 100% perfect foresight, but they can make more accurate predictions now than they ever could in the past. Though each individual business, industry, and region is affected differently by different external factors. The list below includes some of the most common impactful external factors that we see among our customers.
- Consumer Sentiment
As the state of the U.S. economy fluctuates, consumer sentiment indicates how confident people feel in purchasing houses, cars, electronics, travel, and other goods and services.
- Disposable Income
By tracking the rise and fall of the amount of money consumers have remaining after paying bills, retailers, manufacturers and service providers are able to determine how much consumers have to spend. Combined with consumer sentiment, companies can better anticipate whether consumers have money, and whether or not they are willing to spend it.
- Residential Real Estate Market
Housing starts and sales of existing homes are strong indicators of demand for building materials, home goods, and even automobiles. Additionally, the health of the real estate market is a powerful link to the overall health of manufacturing, employment, and consumer spending.
- Oil / Gas Prices
Changes in gas and oil prices have a heavy impact on industries worldwide, including tourism and travel, manufacturing, and e-commerce. From a consumer’s willingness to drive to a store to the cost to ship goods, oil and gas prices play a role in both hard costs and consumer behavior.
- Labor Market and Wages
Changes in the job market and wages affect consumers’ willingness and ability to buy. Combined with the personal savings rate, which shows how much of their income consumers are stashing away, these metrics are additional indicators of consumers’ buying behaviors.
- Weather Data
Severe winter weather, harsh droughts, heavy rains and extreme temperatures all have huge implications for retailers, global manufacturers and construction and development companies. From transportation shutdowns to development delays, severe weather can cost companies millions. In fact, a one-day shut down in New York can translate into $152 million in lost retail sales, according to an IHS Global study.
- The Strength of the Dollar
Many global corporations cited currency movement as the top reason for missing their quarterly forecasts this year. The strength of the dollar has huge implications for the cost of making and buying goods and services around the world. Companies who can tie in the changes in value of the U.S. dollar directly to the costs of making, selling, and shipping their products will have a better view of how sales will fare over the next quarter.
- Raw Material Costs
Fluctuations in raw material costs can reveal more than just a potential price change in the product being manufactured. As materials become more or less expensive to make/purchase, demand and even consumer preferences are affected.
- Industrial Production
Many enterprises are surprised to learn that industrial production of key commodities, such as polymers, cardboard, plastics, glass, dairy, coffee, cocoa, wheat, and corn are hidden indicators of their future performance.
- Architecture Billings Index
The billing activity of architectural companies is a 12-month leading indicator for building materials and supplies. In general, as manufacturers and construction companies see architectural billings rise, they can anticipate an increase in demand 12 months later.
External Factors That Improve Forecast Accuracy
Examples of companies missing forecasts due to external factors are in the news weekly, yet many don’t know the next step to take to improve their forecast accuracy. The major pain point companies face today is how to gain actionable insights from external data – better than and before their competitors. Identifying leading indicators is the first step to incorporating predictive analytics into business forecasts.
While the majority of companies think they do a good job of using data to drive strategic and operational decision-making, the irony is that 60% of the survey respondents say that locating the right data is their organization’s biggest challenge and 62% stated that their company’s collective data analytics skills are at or below average. Moreover, more than two-thirds of respondents stated that they are dissatisfied with their company’s ability to understand the impact of external factors on business performance. (To read the full complimentary report, visit Bridging the Data Divide.)
To help bridge the gap, executives should prioritize external data that is predictive and strategic. By doing so, businesses can uncover insights that:
- Enable them to see upcoming headwinds that can hinder performance
- Help them understand if a weak quarter was just a seasonal slump or a sign of worse things to come
- Increase return on investment (ROI) for marketing spend
From anticipating changes in the overall cost of making and shipping products to predicting the rise and fall of future sales and demand, identifying and quantifying leading indicators will help companies craft more accurate financial forecasts and, ultimately, save money and increase revenue. To learn more about how to leverage leading indicators for your business, contact us.