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The contribution of the economic forecast to the business plan.

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?


Many erroneous business decisions stem from economic assumptions that represents nothing more than an extrapolation of the past and present into the future. Such expectations fail to take into account the fact that the only economic certainty is change. At any point in time a myriad of potential developments could have a significant influence on the economic environment. Anticipating such occurrences and estimating their ramifications for the economy can be extremely difficult.

Events during the past quarter century demonstrated this point quite clearly. The Vietnam War, OPEC actions, industry deregulation, abnormal weather conditions, political and military conflicts and monetary and fiscal policy shifts have had profound unticipated effects on the economic environment. The surges in the federal budget and trade deficits, abrupt changes in inflation, interest and foreign exchange rates and cyclical fluctuations in business activity and security prices that occurred during this period caught the majority of forecasters by surprise. Consequently, one should not expect the predictions of business economists to be infallible. Nonetheless, several steps can be taken to improve the accuracy of economic forecasts.

It is important as well as reasonable to require that economic predictions be ideologically unbiased, theoretically sound and internally consistent. Care must be taken by business economists to ensure that their analyses and forecasts are objective and that economic information obtained from external sources also is bias free. Unfortunately, many business, government and academic economists allow their political views and economic beliefs to influence their work. Biased economic predictions have become commonplace and have been responsible for many glaring forecast errors in recent years.

Far too many business plans are based on single point forecasts at times when the outlook for the economy is far from clear. One effective method of dealing with the problem posed by economic uncertainty is to present a forecast range. Another approach that is more acceptable to corporate managers is to prepare plausible alternative forecasts in addition to the most likely or base prediction. Each of the forecasts should be based upon a diverse set of underlying assumptions. Differing energy prices, foreign exchange rates and monetary, fiscal and regulatory policies could, for example, serve as key scenario assumptions. As an aid to planning, probabilities should be assigned to each scenario and to the base forecast.

An alternative forecast is worth preparing if three tests are met. One is that a reasonable likelihood exists that the scenario could prove correct. The second is that its occurrence would have an impact on the organization that would differ significantly from the consequences of other economic outcomes. Finally, such an economic environment should call for business strategies and tactics that differ appreciably from those required to succeed under the base forecast.

Corporations reap several benefits from taking the trouble and incurring the expense of employing alternative economic scenarios. Diverse projections encourage management to look beyond the present to the future and enhance awareness of the economic and other uncertain interrelated environments in which the organization operates. Divergent outlooks foster recognition of the business opportunities and threats that can be created by changing economic conditions and the revisions of strategies and tactics that they may require. Differing scenarios also increase recognition of the risks of basing business decisions on a single point forecast and underscore the importance of continuously monitoring and analyzing the economic environment. Most important of all, alternative economic scenarios permit time and care to be taken in formulating contingency plans and strategies. This process enables appropriate responses to economic possibilities to be developed thoughtfully and implemented quickly should such eventualities occur. Finally, given the many uncertainties about the economic outlook that always abound, it should be kept in mind that an alternative scenario could prove more accurate than a "most likely" or base forecast.


All too often, organizations employ macroeconomic forecasts for purposes that demand microeconomic perspectives. Broad overviews of the state of the nation's economy are of clear value to federal policymakers and are of interest to the news media and general public. However, they have little direct relevance to the operations of business organizations. No corporation produces a mix of goods and services that remotely matches the physical composition of the industrial production index, the geographic distribution of the gross national product or reflects the prices measured by the consumer and producer price indexes. Nor are changes in such aggregate measures closely correlated with movements of the revenues, expenditures and other financial variables of the majority of companies. Nonetheless, such statistical series are accorded prominent positions in most corporate economic forecasts, budgets and long-range business plans.

If economic forecasts are to contribute to the success of a company, they must support the plans and the decisions of its managers. This support can be achieved by providing disaggregated economic information directly relevant to the firm's current and potential business operations, regardless of whether forecasts and analyses are made using a judgemental approach, econometric techniques or some eclectic combination of the two.

Every business organization is different. Each has its own particular output, structure, management, operations and markets. Consequently, each corporation has its own unique economic information requirements. Therefore, forecasts and analyses must be tailored to provide data that can be incorporated into the company's planning and decision-support systems. Only then can economic information be employed by line and staff managers for a variety of purposes, including preparing annual budgets, developing long-range plans, making tactical decisions and formulating business strategies.

Preparing forecasts and analyses that meet the requirements of line and staff units requires far more than an understanding of economic theory. The effects of the economic environment on the operations of the enterprise must be understood, which requires identifying the economic variables impacting the organization and then quantifying their effects on operating results. To accomplish this job, the economist must be familiar with the corporation's objectives, products, operations, customers, markets, competitors, suppliers and financial reporting system. Obtaining such information requires drawing on the knowledge of line and staff managers and sources outside of the firm.

The value of economic forecasts can be enhanced by furnishing a wide variety of information directly relevant to business operations. Foreign economic information can be provided to aid in planning and decisionmaking for operations abroad, which may require furnishing economic and industry forecasts and analyses for several nations. Regional data can be provided for geographic areas within countries where key markets and business units are located. In the United States, this analysis can include statistics for states, counties and municipalities. Predictions of prices, price indexes and deflators add to the value of economic forecasts. In addition to being used to forecast business unit revenues and expenditures, such data can be used to calculate constant price or "real" measures of corporate, industry and economic activity. Forecasts of economic variables affecting the customers, suppliers and competitors of the corporation also can be provided. Such information can be used to assess the many significant indirect effects of economic change on business operations.

Identifying and quantifying the actual and potential effects of the economic environment on corporate operating results are facilitated by the use of analytical and predictive models. Such models can be constructed through the application of regression analysis and other statistical techniques to economic, industry and corporate financial data. This step requires an understanding of the company's accounting system. It also necessitates a knowledge of the identity and features, including strengths and weaknesses, of the economic measures relevant to existing and proposed business operations.

Business economists must deal with the fact that the availability and quality of economic statistics are far from ideal. Timely and accurate economic measures are few and far between. Insufficient, erroneous and outdated data are the bane of economic analysts and forecasters. Consequently, care should be taken in employing economic statistics, especially series subject to substantial and frequent revision. Periodic forecast updates can help deal with this problem. Another approach is to substitute, whenever possible, corporate and industry data that reflect external environmental conditions more accurately than available economic statistics.


As a wide variety of events can cause economics conditions to deviate quickly from expectations, even the most carefully prepared predictions cannot hope to anticipate all occurrences. As a result, in today's rapidly changing world statements about the outlook for the economy often are obsolete by the time they are issued. Yet, many corporations rely on economic and other environmental predictions made only once a year.

To diminish the problem of obsolescence, forecasting should be an ongoing process to ensure that economic predictions reflect the latest available information. The economy must be monitored closely and continuously as part of the forecasting effort. Predictions then can be updated quickly in response to new developments expected to have appreciable effects on the economic outlook and on the outcome of corporate plans and decisions.

Periodic revisions offer an alternative approach to the problem of outdated forecasts. A reasonable schedule would be to update short-term predictions quarterly and long-term projections twice a year. The likelihood of forecast obsolescence also can be diminished by preparing predictions when they are needed by business planners rather than at a time convenient for the forecaster. While revisions and periodic updates of predictions and projections are costly, they can prove far less expensive than the consequences of business decisions based on out-moded expectations.

In order to prepare the timely disaggregated economic information needed to develop strategic and tactical business plans, many corporate economists employ a multistage sequential forecasting approach. Each iteration of the process usually begins with the formulation of several key assumptions relevant to the future economic environment. As the example in Table 2 indicates, endogenous and exogenous assumptions are used to develop a macroeconomic forecast. This forecast then can be disaggregated into detailed economic data relevant to actual and proposed business operations. The microeconomic and industry forecasts that evolve are incorporated into the organization's planning and decision processes. Detailed predictions of corporate operating results are then prepared. Finally, tactical and strategic responses then can be formulated to take advantage of opportunities and surmount obstacles expected to be posed by anticipated economic and other environmental conditions. The process can be facilitated by the use of linked econometric and corporate financial planning models. Several procedural steps in the forecasting process can benefit greatly from cooperative efforts involving business economists, planners, accountants and other line and staff unit managers.

The use of econometric and financial models in the forecasting process offers several advantages. Models expedite translating and tailoring economic expectations into information of practical value to business decisionmakers. Models, for example, help ensure that the plans and decisions of all staff and line units are based on an internally consistent and uniform picture of the expected economic environment. Linked economic and financial models facilitate disaggregating data and analyzing and estimating the consequences of potential economic changes on business operations. Modeling expedites the development of alternative economic scenarios and the formulation of appropriate contingency plans. Finally, computer-based models permit forecasts and corporate strategies and tactics to be revised quickly in response to sudden unexpected economic developments.

Table : Table 2

A Sequential Approach to Economic Forecasting

1. Formulation of assumptions about exogenous and endogenous

forces expected to affect future economic conditions.

2. Preparation of domestic and foreign macroeconomic forecasts

to provide an overview of the expected environment.

3. Derivation of microeconomic, industry and regional forecasts

relevant to current and proposed business operations.

4. Integration of economic forecast with other environmental

expectations and with internal corporate information.

5. Utilization of external and internal information to forecast

operating results for each strategic business unit.

6. Formulation of strategic and tactical plans for staff and line

units based on external and internal information.

7. Development of a consolidated corporate plan consistent

with environmental forecasts and resource constraints.

8. Monitoring and analysis of economic variables to determine

if actual conditions match environmental expectations.

9. Revisions of environmental forecasts to reflect significant

unanticipated changes in the outlook for the economy.

10. Adjustment of strategic and tactical business plans and

decisions in response to updated economic expectations.


No matter how accurate, relevant and timely economic forecasts are, their value will be limited unless they can be clearly understood and utilized by business planners and decisionmakers. Forecasts have little or no corporate value if they are intelligible only to an economist and are too lengthy and detailed for all but the most determined reader. Business managers should not be required to translate forecasts into information that they can comprehend. Nor should more information than they require be forced upon them. Lengthy presentations, complex tabulations, economic terminology and statistical symbols should be avoided in favor of brevity, clear prose, concise tables and simple graphs.

Introducing economic forecasts into the planning and decision processes of business organizations can be difficult. Often considerable managerial opposition arises to such a move. Such entrenched resistance to change can be overcome by an educational program that demonstrates how economic forecasts can contribute to the overall success of the organization and the personal success of its managers. Such an effort could begin by informing staff and line managers about the numerous ways the economic environment can affect the operations of each business unit. The educational effort could close with illustrations of how economic forecasts and analyses can be employed to diminish uncertainty about the future. This process could include demonstrations of how managers, with the assistance of the firm's economists and planners, can integrate economic statistics with other external information and with corporate data to furnish an environmental base for strategic and tactical business plans and decisions. Several linkages between economic information, corporate operations and business decisions are presented in Table 3.

Table : Table 3

Examples of Relationship of Economic Variables To Corporate Operations and to Management Decisions
Economic Variable Corporate Impact Management Response
Business activity Accounts receivable Credit terms
Energy costs Operating expenses Efficiency programs
Exchange rates Import costs Sourcing choices
Interest rates Borrowing costs Financing strategies
Industry output Capacity utilization Expansion plans
Industry prices Sales revenues Marketing campaigns
Industry sales Operating levels Divestiture plans
Inflation rate Inventory investment Order quantities
Labor force Employee recruitment Compensation practices
Medical charges Labor costs Benefit adjustments
Stock prices Equity valuation Acquisition plans
Tax rates Tax payments Facility relocations
Wage levels Operating costs Productivity programs

While the economy has a major effect on the operations of all business organizations, other external and internal forces also play important roles. Included are influences of such constituencies as the company's customers, competitors, suppliers, creditors, employees and neighbors. Government legislative and regulatory actions, social and demographic trends and technological change also are important components of the external environment. Internal influences, such as the objectives, management, finances, organization, policies, procedures and culture of the enterprise, also have profound effects on its revenues and expenditures. Consequently, strategic and tactical business plans and decisions must be based upon stated or tacit assumptions about all of the significant environmental influences on the operations of the corporation.

To ensure that the interrelationships between the economy and other influences on the organization are taken into consideration, the economic forecast must be coordinated with other environmental expectations and integrated with internal corporate data. Once this coordination is accomplished, all of this information can be incorporated into the corporation's planning and decision processes.

Business economists need not confine their activities to monitoring, analyzing and forecasting economic variables. By expanding their range of responsibilities, they can enhance their contribution to the organization's planning and decision processes. Management attention can be drawn to current and anticipated economic changes and to existing and emerging economic issues likely to impact the organization to a significant degree. The consequences of economic events for other major environmental influences can be assessed. Estimates of the ramifications of the expected economic environment for domestic, foreign and regional operating results can be provided. Business economists can augment their value to the organization further by assuming an advisory role in managerial planning and decisionmaking. Tactical and strategic actions can be recommended to take advantage of favorable and mitigate the consequences of adverse economic developments. Public relations, political action and lobbying campaigns can be proposed to deal with critical economic issues. Attention can be drawn to such advice by making it an integral part of the forecasts and analyses of business economists.


Information about the economic environment is of value to corporations only if it contributes to improved tactical and strategic business decisions. Consequently, economic forecasts should be as accurate, relevant and timely as possible. In addition, the content of forecasts and analyses should be tailored to meet the specific information requirements of the company's staff and line unit managers. Business economists can enhance their roles in the tactical and strategic planning processes by expanding the scope of their activities. In addition to monitoring, analyzing, reporting and forecasting economic conditions, business units can be informed of the estimated consequences of the economic outlook for their operations. Alternative economic scenarios can be developed and advice can be offered about appropriate tactical and strategic responses. By improving the ability of managers to adapt to economic change, business economists can greatly enhance their contributions to the success of the organizations that employ them.
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Author:Casson, John J.
Publication:Business Economics
Date:Apr 1, 1989
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