Forecast 2021 without guessing or hoping

Graph: Kevin Kehoe

I conducted several webinars last spring outlining best practices for managing the potential business risks associated with the COVID-19 pandemic. At that time, I said the political response to COVID-19 would run its course by the summer. I was way wrong. First, it demonstrates the hazards of making forecasts. Second, we are arguably in a worse situation today than we found ourselves in then. Therefore, I have no 2021 forecast to share. What I can say with some confidence is that COVID-19 will affect the economy. You have to decide if you run your business based on data and facts or fear and guesswork.

As the founder of a software company, Aspire, I have access to good data. In fact, more than $3 billion dollars’ worth in terms of annual revenue. The data tells a compelling story about how high-profit companies achieve results — whether by design or by happenstance. In my last four columns, I outlined the key performance indicators (KPIs) and how they drive net profits. The data from Aspire confirms that these KPIs matter, and they suggest a process of causality, meaning that one ratio or metric drives or causes another one. This provides a way for managers to forecast and create a virtuous business cycle. Specifically, the data suggests that service mix drives overhead and price drives gross margin. Together, they drive net profits. For example, construction requires less overhead than maintenance, but maintenance makes a better gross margin.

The example demonstrates the impact of changes in mix and price on a business. The labor leverage for construction does not reflect the impact of estimating markups on materials and subcontractors. These have the effect of lowering that ratio significantly.

Our company produces the industry average of a 6 percent net profit with its current mix and pricing strategies. When we make subtle changes in mix and pricing, our company’s net profits double. The real lesson for managers to plan and forecast is that while there are many uncontrollable factors in running their businesses, mix and pricing are decisions and actions that are very much in their control.

The challenge for too many companies is not so much that they couldn’t execute this strategy. The challenge is they don’t have the data to understand by how much they need to change mix and price. They lack the software systems that can provide that data in an accurate and simple way. This should not be the case in today’s world. To drive net profits up, we cannot be guessing at this information or hoping we have it right. We need to know.

When you integrate insights from your own business data with industry benchmarks and then combine them with your experience, intuition and passion, you have done all you can to be responsible for your success in 2021. Here’s a New Year’s resolution — no more guessing and hoping. Happy New Year!