Regardless of the type of business, and in this case, I am using the example of an entrepreneur who has just passed their 21st year in the publishing business. Unfortunately, they were unable to cover their fixed costs and ran into a net operating loss (NOL) for the year. How could this entrepreneur budget for success this year?
The company's budget? They use historical data from prior years to anticipate shortfalls.
As, forecasting provides goals and courses of action, what can this business owner do to turn his company around by using a sound budget?
Last year, between the months of October to April, s/he paid her vendors late (at least 90+), always running into the situation of having to pay C.O.D. or else her paper, ink, and other printing needa (vital supplies for a publishing company) would not be delivered, and production would have to slow, thus causing undue strain on her customers. S/he eventually paid each vendor off after an influx of cash between the months of May and September, but has since already tarnished her relationships with vendors who are historically unsympathetic and now threaten to leave.
S/he's had to spend extra time and labor to find new vendors until she could pay off the prior ones. In this case, she wasted labor and valuable time.
In terms of labor, s/he employs 13 Full Time individuals in administration including the VP, Customer Service Manager, Sales Manager, Sales men/women, and the one new accountant. 13 part-time workers are in the print shop, working more when demand is high, and less during others.
The horror to the new accountant is that she calculates the cash position daily, and payroll is barely able to be met on several occassions, not to mention she's having to scmooze the vendors and collection companies that keep harrasing her.
The owner is touted by the entire company as having the best luck in the world, by just being able to make ends meet, but this shouldn't be the case. Employee morale continues to decline and many speak of leaving the company because of the financial situation. Many are suspicious if their jobs will last.
The owner has even made mention of getting into pornographic publications to bring in more revenue even though s/he doesn't wish to.
*** ADDITIONAL INFORMATION ***
From a forecasting standpoint, there are undoubtedly, decisions to be made that involve judging the future course of the business and the economy. They may include whether or whether not to:
1. expand internationally
2. expand regionally or locally
3. increase or decrease the product mix
4. change the product mix based on demographics
5. respond to fad, fashion or other expected market changes
6. spin out sections of the business
7. change the ratio of debt to equity structure
8. restructure long term debt based on interest rate forecasts
9. change employee benefit programs
10. change product pricing
11. make investments in equipment, building or even other companies
The budget process comes along behind the forecasting issues.© BrainMass Inc. brainmass.com June 3, 2020, 9:24 pm ad1c9bdddf
This true story is not an uncommon tale at all. In fact, it may be more typical than not in the world of growing businesses. I would speculate that the owner started this business on a shoestring and it became very successful. He or she went along for years with little future planning either because it wasn't needed or there wasn't time. New people were hired when existing staff was overloaded almost on an emergency basis. The owner has now waited almost too long to fix it and may even be oblivious to the need to be more formalized in business procedures.
You asked specifically about forecasting, and if you accept the definition of forecasting as one in which the future is estimated as accurately as possible, then I have some ideas for this company:
1. I would retrieve last year's budget and compare it to actual. We have to assume that the budget projected a profit which says that something went wrong. It must be that either sales didn't meet expectations or costs were out of line. So the first step is to analyze what happened. This process is not one of recrimination but one of understanding. It is entirely possible that what went wrong was entirely beyond the control of the company.
2. Once that is known, then the current year budget should ...
The solution provides a lengthy list of 14 possible steps this company can make to save itself. Most of the ideas concentrate on budgeting and planning in constructive scenarios designed to promote future success. Each of the 14 points is two or three sentences in length with good detailed explanations.