“Are You Thinking Ahead?”
I’m sure you are after reading last week’s post and thinking about your financial future. We’ve talked about risks and obstacles that can be thrown your way in business. Accurate forecasts offer us different tactics to avoid the stress those risks and challenges put on us. Now, sales are rolling in and each month you need to prepare for the next, increasing your sales and generating profit. The question is, which forecasting approach is best for your company?
A top-down approach is driven on market demand. An understanding of the market through historical trending data and/or the sales pipeline to gage expected revenue is necessary. Then, align your organization’s expenses. The challenge is whether or not the business is structured to capitalize on market demand–a high market demand means you may be losing opportunity if you don’t have the necessary resources aligned internally.
A bottom-up approach is driven on resource supply. It answers questions like “how many hours of work can I bill?,” “how many widgets can I get produced?” and “how much crop will my fields yield?” Estimate potential sales revenue of a product in order to establish the total sales figure.
Both of these approaches can end up with differing results, and there is an extra component to forecasting that enables you to compares those differences–the gap analysis. With only the top-down approach or the bottom-up, there is no comparison and it can be misleading with revenue or supply. Gap analysis allows for a more holistic view of the business. Viewing the difference between a Top-down and bottom-up can give you actionable intelligence. For example, more market demand means you can safely hire more people, or a constraint on resource supply could determine the possibility of raising prices to increase margins.
Each business’ need is unique based on the industry and market conditions. But having the ability to view and compare all three models with ease could potentially give you a competitive advantage.