Dealer Insights - November/December 2013 - Getting More out of Forecasting
If you use forecasting at your dealership, and feel that you put a lot more effort into the process than the benefits you derive, you aren't alone. Eighty percent of businesses contacted in a recent survey say they're reaching less than one-half of their potential productivity in their budgeting and forecasting efforts.
Nonetheless, 73% of the respondents still consider forecasting to be a "valuable activity," according to the survey by CEB, a member-based advisory company. Here are some suggestions for getting the most out of your forecasting efforts.
Starting out on the right foot
A financial forecast is a statement of the expected outcome of a given set of events. Start your annual forecasting process with a firm idea of what you want to forecast and how you'll use those predictions as the year advances.
First, consider what data sources you'll use. Your manufacturer's daily operating control (DOC) reports contain timely, comprehensive information. Your manufacturer's research (on the market share your franchise should obtain) is another essential forecasting resource.
Industry reports are another good forecasting tool because they analyze economic trends. And using anecdotal evidence and guesstimates based on what's happening in your marketplace is an additional way to incorporate the knowledge you possess that reaches beyond facts and figures.
An annual forecast allows you to set milestones for your dealership. At a minimum, your forecast should predict your income, expenses and net profits in each department month by month.
Forecasts have an additional use beyond business planning: Banks are increasingly requesting them at the time of loan applications. And they'll hold you to your financial predictions, which is another reason for your forecast to be realistic.
Adjusting the forecast
A forecast will let you know what to financially expect as you review where your business stands monthly, or even weekly. You can then adjust your strategies and create action plans to stay on target. You'll reforecast your dealership's financial outcomes when effects happen that will influence your business. Forecasts also can help you identify risks — and take the necessary steps to mitigate them.
Budgets and forecasts work hand in hand. Your forecast combines budget information with actual results and new trends and events to "forecast" results continuously through the 12 months.
Analyzing possible scenarios
Forecasting presents the opportunity to analyze various scenarios that could affect your dealership. You might want to create both conservative and optimistic income projections to cover all bases.
For example, you suspect that a dealership in your market with the same franchise will shut its doors sometime in the next six months. You can predict the effect the closing will have on your business (on income, cash flow, showroom traffic, staffing and so on). Forecasting this event can prompt you to formulate action plans to maximize the opportunity and grow your bottom line.
Here's another scenario: The economy in your market takes a downturn and new car sales fall off, again. If your dealership fails to meet a forecast for two months in a row, management should take action. What would you do to keep your forecasted net income on track? Would you lay off staff? Would you try to expand your used car and service operations? Would you postpone that planned building renovation?
Forecasts (and budgets) vary in the length of time they cover and in the amount of detail they provide. Three- to five-year forecasts are most useful as long-term strategic planning tools. Detailed month-by-month forecasts are essential as management tools if sales fluctuate seasonally, which they do at most dealerships. A good place to start is with an annual forecast that predicts, at a minimum, your income, expenses and net profits in each department month by month for the coming year.
The value of insight
Going through the process of forecasting provides insight into the components of your dealership that make it tick. The closer you keep an eye on the "moving parts," the better prepared you'll be to react wisely to change — strategically and operationally — and, as a result, meet your financial goals.
Sidebar: Who's on the forecasting team?
Each department head should create annual forecasts for each area of your dealership's operation, and base those predictions on changing scenarios. The department managers, along with the general manager, will then develop your budget for the year. Your controller or treasurer can assist with financial questions, and help the team with the expense side of the budget to make them aware of which items constitute the various lines on your profit and loss statement. This also is a great exercise to find excess expense or waste within your dealership's operation.
Your CPA can assist you in specific areas, such as cash-flow forecasting and comparative industry benchmarking. Once you've gone through the process and have templates in place, the job will be much easier next time around.
Dealer Insights - November/December 2013