How to reflect on 2014 and forecast for the year ahead

The year 2014 brought new insecurities throughout the globe. The meteoric rise of terrorists in Syria and Iraq, Russia’s aggression in Eastern Ukraine, Ebola outbreaks in West Africa and police bias followed by racial protests in the US all shook our core expectations for world order.

Here in Kenya, we faced increasing insecurity, sometimes debilitating squabbles between central and devolved government functions and rising bureaucracy to businesses.

But mitigating some of the negative trends is the stunning drop in world oil prices that makes almost all goods and services cheaper; phenomenal new technology startups reaching global scale from Nairobi’s premier incubation hubs – NaiLab, mLab, GrowthAfrica and 88mph; and less uncertainty on the global stage with regards to the Kenyan cases at the International Criminal Court.

All these boost our business prospects. However, what should business owners expect going into 2015? How should we plan?

First, every business owner should look back on 2014 and come up with a list of “what we expected” and “what we did not expect”.

Take every major sale, serious purchase or material interaction and view it in light of expectations. Business owners frequently do not reflect on meeting their expectations from prior years. This creates problems with reliable forecasting going forward.

How did the expected and unexpected factors impact your business? If you operated a tourism-linked venture, what proportion of your sales decline came from cancellations or lack of new business due to security concerns or unfounded Ebola fears?

When an unexpected event impacts business, executives often blame it for every other negative aspect in the firm. But searching for excuses helps no one. Find specific links to antecedents that caused negative events in your business.

Some negative consequences for a tourism firm might be the culminated results of poorly furnished rooms and bad marketing even as the uncontrollable factors affected business. Shareholders should not give executives a 100 per cent pass based on excuses when they could actually control 40 per cent of their decline.

Next, make a realistic plan for 2015. Business planning often yields laughable results. A firm with a historic growth of five per cent per annum will often present investors and bankers with projections showing 40 per cent growth in each of the next five years.

While optimism stands as a positive hallmark for entrepreneurs, it often crosses into hubris and harms the entrepreneur from making realistic expectations.

Given the global and national business climate, experts now recommend that businesses employ a four-pronged business forecasting approach.

1. Come up with what you expect to sell and buy under ideal conditions. Perhaps you will go to industry conferences and everyone will love your product. Alternatively your website will pick up and you double your online sales. Maybe the Business Daily will feature you and you triple your consulting clients. Whatever the possibilities, dream of what you can achieve in ideal conditions and call it your “best case scenario”.

2. Take your best case scenario and reduce your sales and expenses by 25 per cent. In the real world, most ideal scenarios do not line up perfectly. Think through what you can realistically achieve and create your likely case scenario. Do not expect massive growth in the future when you realistically never achieved it in the past.

3. Take your likely case scenario and reduce your sales by another 25 per cent but only reduce your costs by 10 per cent. In reality, you cannot reduce your expenses as fast as you lose your sales. Many expenses, even some variable ones, are fixed in the short-term or have already been incurred – such as a ramp up in inventory prior to an expected busy season. You might plan that your worst case scenario might take hold with a 30 per cent probability.

4. Build a catastrophic case scenario. In your hypothetical catastrophic situation, also build into your model how you would deal with the massive external shocks that would likely cause the scenario.

No tourism operator realistically forecasted a double terrorism and Ebola effect for 2014. Going forward, tour operators should factor in even a third, yet unknown, external shock.

Investors and bankers appreciate business owners who think through all the likely scenarios that may impact their business. The mark of death for investor confidence in an entrepreneur involves forecasting wonderful future results and yet under-delivering on expectations.

Investors nearly uniformly agree that you should provide realistic expectations with some lower estimates for conservatism and then exceed expectations if you have a good year.

Prof Scott is the director of the New Economy Venture Accelerator (NEVA) at USIU’s Chandaria School of Business; www.ScottProfessor.com, and may be reached on: [email protected] or @ScottProfessor .