A large proportion of firms are burying their heads in the sand when it comes to the economic slowdown according to research from KPMG.
The market watcher has claimed that 45% of business directors it surveyed are failing to make strategic changes to their decision making, and are continuing to pursue the same options for their organisation that they were 12 months ago.
After two decades of planning for growth, many directors have no blueprint to help them answer the ‘what ifs’ involved in decision making in a downturn, KPMG states.
According to KPMG, reacting to falling sales is the primary challenge in most sectors, requiring tough decisions about scenarios ranging from cost cutting and cash maximising, to site mothballing and closedown. These issues then each raise a series of follow on questions such as what are the costs of a redundancy programme, how much could be raised by the sale of an asset or part of the business, what actions are competitors taking, what are the fixed costs of a mothballed operation and how easy would it be to restart production when the upturn comes.
Fiona McDermott, business modelling partner at KPMG, said: “Accurate and relevant forecasting has been a victim of the credit crisis, as the usual variables that previously went into a forecast are shrouded in uncertainty.
“Sales volumes, prices and availability of finance can all change dramatically in a short time. Businesses can’t even be confident that their main suppliers and customers will be around for very long. This has a dramatic impact on a business’ ability to develop strategy, after all, its pretty hard to look six months or a year ahead, when you are not even sure what the next day is going to bring.”
“As a result some managers may be tempted to believe that forecasting is a waste of time. In fact, its more important than ever to understand the short and long term business impacts of critical business decisions.”
Worryingly the research also found that 69% of business directors have not changed the information on which they base their forecasting and planning.
McDermott added: “Board level focus needs to turn to how additional modelling and analysis can guide planning in this new and changing environment, and we are being asked to build forecasts for companies that incorporate a wider range of data such as detailed competitor analysis, customer viability studies, energy, raw material and labour costs; macro economic trends; market demand and pricing; and the cost and availability of credit.”
A further challenge for managers trying to adapt their planning process to the new environment is the need to streamline and simplify the data gathering process to enable the business to be more fleet of foot.
“Many companies’ forecasting processes are unwieldy, involving the pooling of large and incompatible chunks of data from around the business, which must somehow be consolidated into a useful tool,” added McDermott. “What firms don’t want is a process where it takes three months to produce a forecast and another three to redo it once a firm realises its assumptions no longer apply. We are increasingly involved in designing and building bespoke forecasting models that can fit into existing systems.”
How to survive today and thrive tomorrow is the challenge across the sectors KPMG claimed. One main concern is making sure that the support of banks is maintained in financing the business, in particular making sure that debt payments can continue to be made. However it was not all doom and gloom. According to KPMG, two thirds of business directors believe the worst will be over in less than two years.
McDermott said: “These are tough times requiring tough decisions and a business as usual approach is not a viable strategy. By deploying a dynamic, flexible forecasting process businesses are better able shape both immediate and longer term strategy and to react swiftly to a constantly changing environment by considering new options.”
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