Corporate Finance Manager at RSM Poland
Business activity is continuously connected with foreseeing the future. It is exactly the future, and not the present conditions that decides about success of any enterprise. Whether the enterprise will turn out to be profitable and succeed on the market will result from its ability to foresee prevailing conditions on a widely understood market in the following years. What growth rate will be like, whether the branch of our interest will have to face aggressive competition, how consumer tastes and attitudes will change, in what legal environment we will have to function? Such questions can be multiplied endlessly. What therefore can we do to improve the quality of formulated economic forecasts, and, at the same time, to increase chances of achieving goals established before we start a business venture?
First of all, we should realize that taking economic decisions, the result of which will depend on future conditions, cannot be based only on premises of clearly intuitive nature. Both in a situation when we plan to take over a company or to realize another project based on internal resources, we should always try to proceed in a methodological way.
Because of the fact that economic practice abounds in very different cases, it is difficult to present in a few simple sentences a ready and complete procedure of foreseeing economic phenomena in a company: what methods and techniques should be applied and what initial assumptions should be adopted? Still we can formulate some basic rules which will be undoubtedly helpful in planning and assessing business ventures:
- First of all, taking economic decisions has to be based on the knowledge gained from conducting thorough analysis. The final effect of such analysis should be a forecast (of value or state) of key economic factors, which affect the success of a planned venture. That is why we shouldn’t leave everything to blind chance. It is obvious that a business activity as such is connected with taking risks and the results of this business activity cannot be predicted in 100%. However, we can and should control the risks and maintain them at a reasonable level, even by using services of professional transaction advisors. This is also the purpose of planning that is supported by reliable forecasts.
- The choice of appropriate forecasting methods and techniques should be based on profound knowledge of specific traits of a company, an enterprise or a market it concerns. Generally speaking: what is working in one case, doesn’t have to be a good solution in another situation. Without appropriate knowledge and experience it will be difficult to choose and properly apply appropriate tools.
- While preparing economic forecasts, it is good to ask for their verification somebody from outside, who possesses appropriate knowledge and experience. It may turn out that such person will be able to indicate these elements which were previously omitted or misinterpreted, but they are important to the future shape of economic environment. Support of an advisor can turn out to be a key issue. This person will, on one hand, understand basic goals and assumptions of a new enterprise, and, on the other hand – she will be an authority in a domain of legal conditions and will possess detailed knowledge about rules governing economic relations on the market.
- Always after an investment project is realized and actual values of forecast variables are acquired, we should confront them with our assumptions. If we observe significant deviations, we should examine their nature: whether they are random, or occur in a systematic way, adopting the same direction? Ex post analysis will facilitate assessment of effectiveness of applied tools and may be very helpful in their upgrading and better usage in the future.
Effective forecasting of economic phenomena is one of the key factors determining success in functioning of enterprises, particularly in present times, which abound in fast changes in customer attitudes and tastes, resulting in shortening the lifecycle of many products. Therefore, in assessing chances of success of a planned investment, it is advisable not to read the tea leaves.