CASE STUDY

Projecting Business Volumes and Revenues Using Macroeconomic Data

ABSTRACT

Finance executives at a leading US card issuer sought to gain confidence in their financial projections by understanding their dependencies on underlying macroeconomic drivers. By leveraging a range of verified data sources and proprietary indicators, a model was developed to project volumes and revenues for each of their main products, each based upon market specific macroeconomic indicators, with average quarterly errors of less than 10% over 5 years.

 

Clearly Define Your Business Objectives

The leaders sought to gain clarity in their understanding of expected volumes over a rolling five-year window for each of their main product lines and gain greater comfort in their ability to proactively manage the business moving forward. They wanted to understand business volumes and revenues under varying macroeconomic scenarios – continued expansion, slow down, and recession.

Their primary goals were to both validate their existing hypotheses on the impact of specific macroeconomic factors, and to gain a clearer understanding of potential future market conditions.

 

Acquire & Synthesize Relevant Data

Hypotheses based upon use cases, product functions, and market research were developed for each major product line to develop a shortlist of macroeconomic indicators for use as the basis for a model. Critical factors that would affect the model’s performance such as seasonality, market cyclicality, and market share were also identified to mitigate their impact on the model’s accuracy.

A statistical analysis was performed for each indicator against market volumes, comparing data stretching back 20 years. Each indicator was examined for the strength of its correlation with product volumes and share. Key insights were found when assessing the impact of factors such as time lags, seasonality, and market volatility on the ability to project business volumes looking forward.

Once an indicator was determined, a regression analysis was performed to generate the basis of the market projection (example in Fig. 1). The market projection was used to project internal volumes through an analysis of the client’s historical market share.

Both the market and internal projections were validated against actual data, with average quarterly errors of less than 10% over 5 years.

Fig. 1 – Consumer Leverage vs. Default Rates

 

Develop an Action Plan

Based on scenarios projected by the model, business leaders were able to leverage higher-confidence financial forecasts and better plan for future investment levels, positioning themselves appropriately for potential changes in market conditions.

Resource allocation among the product lines was influenced by the impact of the various projection scenarios, allowing for product lines with greater growth potential to see the necessary incremental investments while taking a more defensive posture with product facing potential headwinds.

Partner with You to See it Through

 

Partner with You to See it Through

This model enabled a clearer understanding of potential future market conditions – information leveraged to develop and implement organization-wide decisions over the next 1, 3 and 5 years. Budgets were strategically developed to target high growth market segments as well as driving product innovations. By tying this projection with an internally-focused, bottom-up projection, greater confidence was gained in the budgeting and investment allocation process.

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