An Analysis of Contemporary Forecasting in Small Business (1996)

Forecasting by small businesses has numerous deficiencies and can be improved substantially ... study indicates some do not prepare forecasts... owner/managers are the major preparers ... many forecasts are for the entire company ... most forecasts are for only one year. Small businesses characteristically are known for their flexibility and ability to adjust to changing conditions, in the face of new challenges in the marketplace. This would imply that they are in a continual state of flux, pursuing the strategy of attempting to out-maneuver rivals, especially larger ones. To a large degree; this is the case. However, small firms are just as dependent on sales forecasting as are their larger counterparts. In fact, the unstable environment confronting many of these firms renders forecasting to be even more important. As is the case for larger enterprises, small concerns require forecasting for planning and control purposes. Despite the need for flexibility, plans are required to guide and orient future operations in all areas of the business, including marketing, production, finance, and human resources. And controls are needed to provide benchmarks and signal the need for change in policies and procedures. Without these activities, management is likely to be caught up in the ineffectiveness and inefficiencies that plague a large proportion of the small organizations that fail each year. Small firms, of course, do not have the forecasting resources that larger companies have. Frequently, management and other personnel lack forecasting expertise and the company is not in a financial position to employ those with this expertise. The company may not possess the computer hardware and software needed for sophisticated forecasting. Further, managerial personnel often have very limited time resources and may feel that they should allocate what they do have to activities such as selling and operations, to the detriment of careful forecasting. This time constraint may limit their exposure to forecasting software that has been designed for forecasting. If the managers are relative newcomers, as many are, they may not be cognizant of the importance of forecasting to success in the marketplace. All of these factors can pose barriers to forecasting success. The study described in this paper was designed to provide insights on the state of forecasting in small business. Specifically, it examined if forecasting was done, by whom, what kinds, the time period involved, methods used, and the accuracy achieved. THE STUDY The researcher sent 20 questionnaires to a randomly-chosen set of 50 college and university Small Business Institute (SBI) directors located in 50 states. Accompanying the questionnaires was a letter explaining the purpose of the study and asking that the SBI director distribute the questionnaires to 20 past and present SBI clients and to collect the questionnaires once they were completed and forward them back to the researcher. Follow up letters were sent to non-respondents. The effort produced a sample size of 347 usable returned questionnaires -- a response rate of 34.7%. The questionnaires had previously been pretested on a sample of 20 small business managers located in the city where the researcher worked. Since the managers were all past or present SBI clients, they satisfied the requirements for classification as a small business, according to the criteria set forth by the Small Business Administration. RESULTS The respondents were asked: each year do you prepare a forecast of future sales? Two hundred fifteen (62.0% of the total) answered yes and 132 (38.0%) answered no. The majority, then, do prepare a sales forecast each year. This indicates some substantial commitment to forecasting. On the other hand, more than one third do not prepare annual forecasts, suggesting that many firms are probably neglecting important planning and control activities. …