The Contribution of the Economic Forecast to the Business Plan

By Casson, John J. | Business Economics, April 1989 | Go to article overview

The Contribution of the Economic Forecast to the Business Plan


Casson, John J., Business Economics


The Contribution of the Economic Forecast to the Business Plan

AS ALL BUSINESS organizations are impacted by the economy, every corporate plan is based either explicitly or implicitly upon critical assumptions about future economic conditions. Therefore, information about the outlook for the economy should contribute to the success of tactical and strategic business decisions. Nonetheless, staff and line managers all too frequently fail to recognize the extent and focus of the economy's influence on business operations. As a result, many companies make little or no effort to obtain and incorporate information about current and future economic conditions into their planning and decision processes.

Neglect of the forecasting effort can cause expectations about the economic environment and its ramifications for future operating results to be grossly inaccurate. It also can contribute to divergent views among staff and line units about the outlook for the economy. The consequences can include conflicting business plans and strategic and tactical decisions having adverse consequences for the organization. The bankruptcies of many corporations offer tangible evidence that the cost of erroneous economic expectations can be very high.

All too often, the predictions of economists are evaluated on the basis of their accuracy. Awards for the "best" - meaning the least incorrect - economic forecast are offered by several organizations. Economists' predictions often are ranked according to their accuracy by newspapers and business periodicals. However, unless such forecasts are intended to serve only marketing or public relations purposes, such assessments overlook a very important point. From a managerial perspective, the value of economic forecasts should be based on their contribution to the success of the organization's plans and decisions. This appraisal requires measuring the value of economic forecasts by more than their accuracy. As Table 1 indicates, several factors that contribute to improved business planning and decisionmaking should be taken into consideration. This evaluation means assessing the relevance, timeliness and utility, as well as the precision, of economic forecasts. All of these attributes reflect the levels of expertise and effort employed in the forecasting process. This assessment applies to the predictions of economic consulting firms as well as to the forecasts of economists employed by business organizations.

Table : Table 1 Economic Forecast Evaluation Questions

* Is the economic forecast based upon plausible assumptions? * Does it reflect the latest significant events and trends? * Is the forecast free of political and theoretical biases? * Are the data relevant to current and potential operations? * Does the forecast present an internally consistent outlook? * Are appropriate regional and microeconomic data included? * Have forecasts of relevant foreign economies been provided? * Is the economy monitored to determine if revisions are needed? * Will the forecast be updated quickly if the outlook changes? * Are estimates of the economy's effects on operations furnished? * Have the data been integrated with other environmental information? * Are several plausible alternative economic scenarios identified? * Have assessments been made of alternative forecast probabilities? * Is this information being used to develop contingency plans? * Are forecasts prepared when business unit managers need them? * Can they be understood and used by planners and decision makers? * Has the forecast been critiqued by line and staff managers? * Are their recommendations reflected in the final document? * Will all units employ identical forecasts to prepare their plans? * Are tactical and strategic responses to economic change suggested?

ACCURACY

Many erroneous business decisions stem from economic assumptions that represents nothing more than an extrapolation of the past and present into the future.

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