Handling Market Volatility: Simple Guidance for Financial Forecasting

The varying market conditions of our present history have created significant challenges for those throughout the business world especially as they relate to financial impacts. Forecasting is an even more critical practice today as interest rates rise and the cost of goods continues to increase.

Forecasting Financial Statements

The greater number of unknowns that reside because of market conditions create a greater necessity to properly forecast. Forecasting is an imperative practice for finance executives that allow them to decide when to accelerate spending and investing as well as when to be conservative in their approach (Dess & Lowrie, 2020). There are many areas that a typical business can look to as a means of gathering necessary data for a compelling forecast process. These include sales, innovation, macroeconomic conditions, industry consideration, and the nature of the competitive landscape. Each of these focus areas allows for greater acknowledgment of past and present conditions to support future predictions.

Handling Historic Sales & Sales Demands

Sales forecasting can be a daunting task, but with the greater extent of historical sales comes an advanced ability to predict future sales. Sales play an important role in the forecasting of financial models, specifically for cash flows and the allocation of inventory (Toptal Research, 2020). Sales offer an insight into the movement of cash throughout the company giving a greater opportunity to forecast. Also, inventory is a direct reflection of customer purchasing decisions and can be adjusted for other market conditions. Sales also allow for organizations to better plan their staff and raw materials based on necessary outputs and inventories (Toptal Research, 2020).

Product Innovation

Innovation typically requires a financial injection of some form. These financial investments have an immediate impact on a company. So, it’s important to ensure that any innovation creates growth opportunities. The objectives for innovation which allow supplies necessary financial forecasting components as outlined by Guell (2019) include launching the best solution for the market, a short time-to-market, and minimal resource allocation. This not only allows for the innovation to be less taxing financially, but it also gives a better chance for faster market adoption and therefore financial return.

Macroeconomic Conditions

Macroeconomic conditions or market conditions help create a financial forecast for individual businesses. Market movement or volatility can indicate the necessity to maintain cash and innovate less, or it can show gaps in market conditions which can have a positive impact on a company. The economic phenomenon typically has widespread impacts that affect many industries simultaneously. A significant shift in employment, for example, might eventually bring a financial burden to many businesses. This would shift the forecasting model to allow for a potential revenue shortfall.

Industry Conditions

A company’s individual industry can provide some of the best indicators for financial forecasting. As most industries are reliant on many individual market segments, any interruption of these conditions would impact a company’s future financials. For example, if the company finds that product innovation is necessary, but their supply chain is reliant on an overseas market that has, at present, less than ideal production conditions, this will greatly impact the forecasted financials.

Forecasting in a Competitive Landscape

There is probably no better indicator for forecasting financials than to look to the competition. According to Coyne and Horn (2009), a critical component of strategic forecasting is to understand a competitor’s actions. The first component is to look at how competitors are responding to adverse market conditions. The second is to understand how competitors have responded to your company’s actions in the past. Has innovation caused them to innovate and therefore saturate the market? If so, this impacts the financial forecast tied to innovation. Understanding a rival’s behavior, also referred to as Economic Game Theory, creates better market conditions for financial success (Coyne & Horn, 2009).

The financial forecasting process can be lucrative if it is allowed to be supplied with necessary indicators. The more a company understands these varying areas year over year, the better it will become at forecasting not just in our present climate, but into a volatile future.

References

Coyne, K., & Horn, J. (2009, April). Predicting Your Competitor’s Reaction. Harvard Business Review. Retrieved February 19, 2021, from https://hbr.org/2009/04/predicting-your-competitors-reaction

Dess, J., & Lowry, N. (2020, May 1). Financial Forecasting for Extreme Uncertainties. The Wall Street Journal. Retrieved February 19, 2021, from https://deloitte.wsj.com/cfo/2020/05/01/financial-forecasting-to-navigate-extreme-uncertainties/

Guell, F. (2019, October 23). Forecasts are a substantial part of any “Business Plan” [Web log post]. Retrieved February 19, 2021, from https://www.fguell.com/en/forecasting-innovation/

Toptal Research. (2020). Https://www.toptal.com/finance/tutorials/what-is-sales-forecasting#:~:text=In%20its%20simplest%20terms%2C%20sales,estimating%20future%20sales%20(revenues).&text=Although%20the%20probability%20of%20finding,and%20empowering%20smart%20business%20decisions. [Web log post]. Retrieved February 19, 2021, from https://www.toptal.com/finance/tutorials/what-is-sales-forecasting#:~:text=In%20its%20simplest%20terms%2C%20sales,estimating%20future%20sales%20(revenues).&text=Although%20the%20probability%20of%20finding,and%20empowering%20smart%20business%20decisions.