What happens next? You can’t risk the answer, “Anybody’s guess”.
When economic conditions are fairly stable, business budgets and forecasts can be prepared with some degree of confidence, based on an enlightened analysis of the past combined with an understanding of economic and market indicators. But the current turbulent economic situation leaves business owners and leaders in need of some guidance for their business forecasting process. However, it’s still possible to create realistic projections which can adapt to a constantly changing scenario, if you know how to go about it.
Current challenges to accurate forecasting
Six dominant economic trends are currently combining to make forecasting extremely difficult.
1. Geopolitical unrest in Europe
Sanctions imposed on Russia by western nations, and Russian retaliation, have driven up the prices of some global commodities, such as oil, gas, minerals and agricultural products, especially wheat. Locally, fuel and energy prices have risen dramatically, lifting business costs. But – on the flip side – Australia is a significant exporter of coal, gas and wheat, and current prices are providing a major boost for the economy.
2. Supply chain disruption
The Russia-Ukraine war has caused a cargo ship logjam in the Black Sea as well as air space and train route closures. China’s continuing attempts to reach COVID zero with lockdowns are creating gridlocks at its globally significant seaports and airports.
3. Material shortages
Aluminium, nickel, palladium and vanadium exports from Russia have been disrupted. These materials are vital for the production of critical products like vehicles, planes, food and beverage packing, construction materials, electronic devices, catalytic converters, capacitors and renewable energy battery storage. Russia is also a significant exporter of potash, an essential ingredient for fertiliser production.
4. Labour shortages
Australian unemployment sits at a historic low of 3.4%. Employees and job applicants are in the box seat. Wage rises and increasing demand for flexibility in working hours and locations are likely.
Consumers’ pent-up desire for a return to normal following the COVID pandemic led to increased spending on travel, dining, entertainment, and discretionary items in general. Rising demand feeds rising prices, and with the added effects of surging global commodity prices, supply chain disruption, materials shortages and wage increases, the stage was set for spiraling inflation. The current inflation rate in Australia is 6.1%, the highest since 1990. The rate is expected to climb further during 2022 before beginning to fall in 2023 and return to more normal levels in 2024.
6. Interest rate rises
The Reserve Bank is responsible for containing inflation, and one of the main levers it uses is to lift interest rates. The RBA cash rate has been lifted in successive months since May 2022, to the current level of 2.35%.
New approach needed for the business forecasting process
Where your previous business plan forecast may have been a process that took 6-9 months to complete, you now need to aim for a rapid response to ever-changing conditions, and this is perhaps one of the things learned during the coronavirus pandemic that can now be applied to the present situation. Focus on the details for the next 3-6 months, with a more generalised long-range plan for when economic conditions change yet again, as they almost certainly will.
The following techniques will allow you to mitigate potential risks and capitalise on opportunities as they emerge over the coming months.
The production of effective forecasts for possibly different sequences of events requires the employment of every available data source, encompassing:
- Historical transactions and results for your business
- Internal expertise and experience
- Data, sentiment surveys and outlooks published by your specific industry body
- Expert outlook and predictions from economists and think tanks
- Latest government data about your industry
- ABS statistics
- Professional association insights
Effective data management is key to business survival in periods of volatility, and growth thereafter.
Keep an eye on the competition
Your business is not the only one affected by current conditions. Your competitive environment is mutating as well, as it adjusts to the new economic climate. You need to stay in touch with how your competitors are faring and what they are doing to adapt, and act accordingly. Such observations may also present opportunities for your business.
Apply strategic analysis to your business
An understanding of the business environment in which your organisation operates, its clients and competitors, its internal processes, its strengths, weaknesses, opportunities and threats (SWOT analysis), will enable you to make better-informed decisions and more accurate forecasts. The SWOT analysis should also be assessed in the context of your business continuity plans.
Employ the latest technology
The days of forecasting with a calculator and a single spreadsheet are long gone. The business accounting software you are currently using should have a three-way budgeting and forecasting module, but it may not be sufficiently flexible for your needs. Your business advisor should be able to recommend forecasting software that will be compatible with your existing systems, and allow you to access advanced planning, modelling, budgeting and forecasting tools.
Get help from forecasting experts
Your business advisor should be your first port of call when you are embarking on your forecasting process. Your business advisor or accountant should be an expert in forecasting techniques, with experience in a wide range of business environments. If you’d like more information on how a skillful business advisor can guide you through economic forecasting for business, we encourage you to get in touch with Bentleys today.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.