Business forecasting is a critical function but many directors are guilty of consistently missing their own forecasts. Mike Tait shares some views about forecasting.
The numerous company turnarounds I’ve led have had a number of problems in common but the one that seems always present is management consistently missing their own forecasts.
Forecasting is no easy subject but its management’s responsibility to do it and mostly get it right. If you frequently or consistently miss your own forecasts it sends loud signals to your investors that you’re not on top of things. There is nothing more politically dangerous than nervous investors that have lost confidence.
Some businesses are more predictable than others. A continuous revenue stream comprising thousands of transactions are generally more forecastable than high value, long lead-time complex sales deals. In these sorts of businesses you have to look closely at revenue patterns across months and patterns within the month, then look at the timetable of promotional activity and how this overlays on base revenues. This can be timing of press launches, TV advertising and capacity of manufacturing to meet demand. Key account activity is another important element. All these can affect revenue results. In high value intermittent sales deal environments the emphasis is about being on top of your individual prospects and pipe-line.
One time, I was newly appointed interim CEO for a very troubled ANPR, traffic control and car parking systems company. This was a typical high value complex sales environment. I got a call from the chairman asking for my forecast. Before I could reply he said “let me tell you what the number must be. I don’t want to hear any other number”. He said this in a very intimidating way. He was one of those that felt numbers get better the louder you shout. I told him in no uncertain terms that if he takes that approach he is being reckless with the business and I was not shifting on my forecast or allowing him to decree numbers.
The story goes on in that he jumped on a plane to come early for the board meeting in the hope of bullying everyone into giving him the numbers he wanted. I found myself mentoring the chairman through a forecasting process and how better decisions were made by getting close to the front line of the business rather than rely on unrealistic forecasts intimidated out of management. There was a trail of devastation from this approach in that company.
When we went into the board meeting the chairman was under strict instruction to be calm and supportive. At the end of that meeting the management team and the chairman declared it the best board meeting they’d ever had. They were for the first time, able to home in on a realistic forecast and make decisions that made sense for the business and the chairman’s investment.
I summarise some key points of advice on forecasting:
- Don’t provide forecasts that fit what you think investors want or demand, especially when the difference between a pressured unrealistic forecast and one that you really think is right, would require different decisions and treatments. This would be weakness on your part and reckless to the business. Time to stand strong.
- Similarly, don’t pressure your team and staff to come up with a forecast that you want or need. You need them to give you a realistic view. What is the point of bullying people to come up with a number to fit what you want to hear just to have it predictably dashed at the close of the period? Support your team in coming up with a forecast based on close examination of their part of the business. Be willing to coach and mentor your people on how to do this.
- Be conservative so that you will stand a good chance of meeting your forecast. Don’t be frightened about a risk of exceeding your forecast. There are few penalties for exceeding, only for missing. Better to cut a bit of expense out of the business unnecessarily than suffer bad losses from an overly optimistic forecast.
- When forecasting is difficult or critical to the health of the business, executives should stay close to the front line of the business by talking with sales people, joining area and regional sales meetings and calling potential customers yourself where appropriate. Customers welcome calls from executives and it’s your opportunity to touch base and find out exactly where they are in the deal and whether this fits with your team’s predictions.
A final but perhaps cynical word to conclude this section because it is related so closely to the subject of forecasting; I can’t stand the word ‘optimism’ in business. Optimism has no place in business in my view. “I am optimistic the deal will come in”…. How many times have we heard that just to find it didn’t? I describe myself as a pessimist with a can-do attitude. While everyone is walking around ‘optimistic’ with their chins sticking out, I’m looking under rocks to see what needs dealing with to get us to our goals. In the process of forecasting, I leave no rock unturned. I try and coach everyone to do the same.