Making a big business decision? Use forecasting to remove the guesswork
Written by Frank Luengo, chief operating officer of Sonora Foods Ltd.
Food and beverage manufacturing entrepreneurs and business owners — like the rest of the world — often face an impossible challenge: predicting the future.
Just about every business strategy and planning question rests on knowing how much revenue you expect to receive in the next three to 24 months. The difficulty level of this foretelling is inversely related to the maturity of the business and the industry or segment it operates in.
Launching new and innovative food or beverage products is much harder to predict than producing a well-known staple, for example. Often, and by necessity, entrepreneurs and emerging businesses need to operate in the “very new and innovative” arena since this is where opportunity often lies.
Add to this layer of uncertainty that comes with evolving health and safety requirements and regulations, and the task becomes daunting.
Without robust forecasting, you will lack the ability to predict cash flows and working capital, hire staff and more.
But the needful is, well, the needful. Without robust forecasting, you will lack the ability to predict cash flows and working capital, seek financing, hire staff or manage your supply chain.
Whether the plan stays true or changes, you constantly need to gauge where you want to go, where you’re headed and how fast.
This becomes even more critical in the medium- to long-term, because you will need a credible long-term forecast to justify capital expenditures.
What’s to come
Over the next few months, we will show you some forecasting and modelling tactics that you can apply to your business to create more impactful and sophisticated business plans, even in times of great uncertainty. We will cover revenue forecasting, P&L modelling and integrated cash flow modelling. We will finish off the series on how to use your forecasts to seek external financing. First, though, consider these fundamental questions.
Can you estimate how much of your product your customer will want, both now and in the future? This question cannot be avoided and will require a level of sophistication and investment — as in, research — that is commensurate with the risk you are taking and the size of the business you’re trying to build.
Channel and footprint
For food processors and brands, the distribution and placement of your products is the foundation for volume and revenue, all other things being equal.
The food and foodservice industries are everchanging and often must pivot to accommodate the unexpected. Therefore, knowing the number of endpoints where your consumer is making a purchasing decision and how you will get your product there is a must.
Cost and capacity
Once you have a macro level forecast, you need to understand how much you can produce with your current capacity and what contribution margin from product sales you can apply to fund future growth. This will inform your growth and capital expenditure plan.
Regardless of the uncertainty you face in your business, developing a strong forecasting muscle will allow you to develop and keep a healthy relationship with your financing partners and help you build a robust and successful business.
Frank Luengo is a Canadian food industry executive with a background and passion in corporate strategy and financing and has overseen the growth of Sonora Foods Ltd. as Chief Operating Officer since 2013. He holds a computer science degree from the University of Toronto and an MBA from the Rotman School of Business.