How early warning systems can help you grow

If we could only know what was going to happen tomorrow, next week and next year, business would be a dream, but the reality is that we have to guess or forecast as best we can and then just get on with life.

I have always been amused at weather forecasters who predict a 10% chance of showers because they can never be wrong. While I am sure we could all do something similar, it would be nice to have a higher level of confidence in our business forecasts. This is where leading indicators play a part.

There are very few businesses that are not directly impacted by changes in the economy. Sometimes there is a direct relationship such as the impact of a downturn in building starts to building material suppliers, while in others a less direct relationship exists or the impact is delayed.

Thus a change in the rate of immigration will effect population growth, which in turn impacts on spending in the supermarkets. By understanding the relationship of economic indicators to our own business, we can estimate the impact on our business at some point in the future, whether that is near term or several years away.

Closer to home, what you might call the product/market interface, we can expect there to be a relationship between marketing activities, sales and operations. Thus a lead generation project might result in sales in three months which in turn results in increased manufacturing activity.

But what if we need to manufacture well in advance of sales? In that case, we need to look out far enough to see what activity is taking place which will provide indicators of future sales and then use the sales forecasts to drive current manufacturing activity. If we get the estimates wrong, we end up losing sales or incur excessive inventory. Finding the right indicators and understanding their relationship to activity levels is critical.

Historical data can be a useful guide to activity levels, but we need to have systems in place which collect the data. We need to gather data on internal and external activity levels on a continual basis so that these can be used later to determine causal relationships.

The objective of the analysis is to find those economic and business marketing activity items which correlate strongly with lagged business commitments such as procurement, manufacturing, inventory levels and so on. These early warning systems then become fundamental planning tools which allow us to mitigate risks and exploit opportunities.

Once we have found these causal relationships we can set about exploiting them. Some are outside our control but we can still use them in planning our activity levels. Others we can influence, such as lead generation or a promotions campaign. We can review our anticipated level of operational activity and flex our marketing spend to increase or reduce the forecast level of sales. The key to reliable business planning is to understand these relationships.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.