Forecasting for new product development

It’s hard to forecast the impact of a new product on the whole business, but it’s important to try.

Each of the levers in the post on accounting for design will affect key parts of your company’s financial statements. To convince the CFO of the value of your project you’ll be forecasting scenarios based on the proposed investment in research, design and innovation. These scenarios can be as simple as guessing the number of units that you will sell of the new product or as complex as full financial models of the entire organisation based on discount factors for out-years.

If your CFO is seeking basic forecasts then your financial analysis of the project will be persuasive. If however, your CFO asks for scenario plans and mock-financial statements then you’ll want to enroll the help of a sympathetic accountant or financial analyst.

The first question that person will ask you is would you like your forecast “bottom up” or “top down”? The right answer is “both”.

Bottom up forecast start from your existing production and supply. They then build up to forecast the possible future sales.

A top down forecast starts with the potential market demand and builds down to answer the production and supply that would be needed to meet that demand.

The flaw of bottom up forecasts is that they are often boring and do not build a sufficient case to invest in break-through innovation. We see this most often in clients as, “We grew at 10% per annum for the last five years so I guess we’ll keep on doing that.”

The flaw of top down forecasts is that they risk being “pie-in-the-sky” and ignoring the organisation constraints. We see this most often in clients as, “The Chinese market for this product will be USD$10 billion so we only need to get one percent of that and we’ll have a run-away success.”

Work with your ally to create forecasts that both stand robustly in the present and aspirationaly in the future. The most powerful technique we’ve met to achieve this is future-casting five years ahead aspirationally and then looking back from there brutally to see each step involved.

The second question your sympathetic accountant will ask is: “How are we going to account for the non-cash impacts of your project?” The safest answer at this stage is “We’re not.” Any brand benefits from a new product should be treated as a windfall.