‘Being optimistic is an essential trait for success, but if this optimism clouds judgement to the extent that completely unrealistic projections are made, it’s a serious problem.’
Some time back my eye caught a headline in a financial publication. Announcing their year-end results, SABx Ubuntu Holdings Limited crowed, “Revenue exceeds forecast by 42%; profit after tax exceeds forecast by 40%; headline earnings per share exceed forecast by 40%.”
I know absolutely nothing about the company except that they are very bad at making forecasts, which would make me cautious about accepting any of their future forecast figures. Maybe next time they will be down, not up. I’m involved with another business where management has chronic difficulty in making reliable forecasts. From one quarter to the next, the figures oscillate wildly.
There are always many reasons given, but when this keeps on happening, no matter what the reasons, it damages management’s credibility and breaks down confidence. was recently asked to help a bank assess the merits of making a large loan to a farming operation.
The crucial assumption underpinning the projected profit of the business was the yield – how many tons of product per hectare they would produce. In their loan application they used a figure of 60t/ha, which seemed on the high side. asked for their actual figures for the past five years, and not once in this period had they produced more than 45t. When asked why yields were going to jump by 33%, they could give no credible reasons. Their unrealistic projection led to every number that they presented being questioned. Quite simply, they lost the confidence of the bankers, and they never got the loan.
Being optimistic is an essential trait for success, but if this optimism clouds judgement to the extent that completely unrealistic projections are made, it’s a serious problem. Loss of confidence makes decision-makers extremely cautious and bedevils sound forward planning on items such as capital expenditure.
An example of accurate forecasting
How should accuracy improve at each stage of a typical annual business planning cycle?
First stage – the budget. It’s prepared before the onset of the financial year, and provides a road map for the year ahead. It’s cast in stone, and establishes a baseline for the year. My expectation has always been that the final year’s result will be within 5% either side of this figure. What’s yours?
Second stage – forecast one completed during month four. With three months down, nine to go, now looking for more accuracy. The final result should be no more that 3% either side of the forecast figure.
Third stage – forecast two, with six months down and six to go it should be no more than 2% either side.
Fourth stage – forecast three, nine months down and three to go, 1% either side. Y ou might disagree with these levels of accuracy, which is fine. You still need to apply standards that drive you and your management towards preparing business plans, budgets and forecasts that give the recipients confidence that you know what you are doing. – Peter Hughes ([email protected] or (013) 745 7303). |fw
