Forecasting In a Time of Uncertainty

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MetalMiner would like to thank Jim Rudnicki of Rudnicki & Associates for sharing this piece from his newsletter and allowing us to collaborate. Rudnicki & Associates helps firms dramatically improve their financial performance.  

Large publicly traded companies like Unilever, Costco and Union Pacific have refused to issue any earning forecasts for 2009, according to a recent article in Economist (click here to read “Managing In the Fog”). The piece also says that today’s exceptionally volatile business conditions have led many CFOs to rate the generation of an accurate annual forecast as the biggest challenge they face.

At Rudnicki & Associates we think uncertainty requires more forecasting, not less.

We recognize that no forecast is ever 100% right, even in the calmest of economic climates.   But that is not the point.   Any view of the future is better than none, even if just to narrow the range of possible outcomes.   Over our firm’s 10 year history we have seen where 13 week cash flow projections, rolling quarterly forecasts and what if planning sessions done correctly have provided enormous benefits to business owners and managers.   It’s the difference between being proactive and reactive.

Now let’s take this earnings forecasting down one level to the operations side of the business. We have seen numerous companies place cost reduction initiatives on hold because they can’t get their arms around new [reduced] volume levels. But can companies truly afford to wait until they have hit bottom? We don’t think so.

Can a firm conduct a strategic sourcing initiative for a metals related category with declining volumes? The resounding answer is yes! Using those same scenarios outlined above on the earnings side, companies can develop purchase scenarios (and we would suggest that at least one of the scenarios include a dramatically revised lower forecast) for planning purposes. We have seen companies achieve great success by conducting strategic sourcing events against a range of forecasted scenarios. And the catch ” that even in the worst-case scenarios, companies still achieve dramatic cost reductions make it foolish not to pursue such an initiative.

Perhaps an example best illustrates the point. Let’s say we are talking about a $50m manufacturer of capital equipment. Through internal cost reductions (e.g. layoffs, shift changes, reduced salaries etc) a company reduces its costs by $500k. Now let’s look at the company’s metals purchases. A $7m metal category size with a 9% savings opportunity (on top of falling prices which the company ought to be taking advantage of anyway) may now be only $4.5m in size (This is only a savings estimate. Actual savings numbers are dependent upon the product mix and current sourcing strategies). The savings moves from $630,000 to $405,000. So even at the lower end of the volume scenario, the company can achieve a similar cost savings to the headcount and salary reductions.

But waiting for the free-fall to stop before taking proactive steps toward cost reduction seems nonsensical. Moreover, conducting these types of events now allows a company to capture the savings on the upside as the economy gains steam.

Have you forecasted lately?

–Lisa Reisman & Jim Rudnicki

Comments (3)

  1. Adam Gordon says:

    No forecast 100% right, that’s for sure. Wouldn’t it be useful to be able to tell a good forecast from a bad one? Like, for example to have a forecast stress-testing checklist, which would be the business (or policy) manager’s core reference in weighing up what the media, consultants, investment brokers, industry analysts, and other yadayada gurus and talking heads are saying about the future?

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