Death, Taxes and Forecast Error

Death, Taxes and Forecast Error

Focus on what you can actually Control

As you read this we are in the middle of re-starting a business that was on the verge of shutting down just three months ago. It’s an interesting story for another time, but suffice it to say we need a forecast for a lot of reasons. The problem is we don’t really have a basis – nothing useable from last year and nothing helpful from this year. We aren’t completely shooting in the dark, but it is pretty close. The one place we can be certain, however, is that we will be wrong and that’s ok because all forecasts are wrong. The key is to make sure you don’t spend too much time. You have to be close, not exact. Going through this process reminded me of a previous employer that literally spent more than $1.5MM annually on developing a forecast that was wrong. And sometimes very wrong. This company employed an army of people and developed a whole host of “models” to develop their forecast. At the end of the day if the results weren’t what the management team wanted they plugged it. Yep, that’s right they blew up their own forecast.

Don’t get me wrong, I’m not saying don’t do it, but spend the right amount of time. The point of the forecast is not the forecast itself, but the variance. Understanding why you are different than expected is far more important. If focus on the variance, you may see better ways to forecast. Spend time on things you can control – things within your building. What people do, how long it takes them, when inventory is purchased and how much. The number of R&D projects and how far to push them. The aforementioned previous employer also spent a ton of money on new products without really understanding what problem they were solving for the consumer. We preach to our clients to make their businesses more responsive, so if revenue comes or doesn’t they can react.

Our forecasts are fast so you can react to variances instead of chasing reality with revisions. They are also metrics based so that if revenue does X, you know the business will have to do Y and not the other way around. Better yet is to make your business less dependent on forecasts. If you take time out of your process, you can react faster. Think about the possibilities of not incurring cost until after the customer places an order. If you’re response time is fast, it’s not that difficult. Too often people use the response time as an excuse instead of a method to improve.

At the end of that day the only truths are death, taxes and forecast error. Control the things you can control….