Friday, August 3, 2012

Better Forecasts?

Industry Week published an article recently about how forecasts are wrong but can be a lot less wrong. I've often told companies and business leaders that forecasts are always wrong. What makes us think we can predict the business and economic future when meteorologists (aka weather-people) can't predict tomorrow's weather very well with over a century's worth of data (365x100x #of weather sites) at their disposal. We know our 12-month forecast will be wrong. Perhaps our six-month forecast will be less wrong. Certainly, there won't often be dramatic influences in the next 30 days, so we could hope to predict our business in the very-near-term.

But what I really like about the article is it's emphasis on financial forecasting, especially cash flow and all the requirements for cash--e.g. payroll and inventory--and its lack of "inflow" like accounts receivable. Some of the featured companies in the article talk about eliminating budgets and working from a financial forecast even at the business units and departments.

Springfield Remanufacturing Company--the creators of the Great Game of Business--use forecasts too. And they're dynamic so that everyone can take into account new information. The forecasts get updated every week, every month. And everyone responds to them.

A budget is something you can't take action on very often. Oh sure, in a crisis, management will create an edict commanding department heads to adjust the budget. But a forecast is adjusted often and is something to which you need to take action if the results are not favorable. A forecast creates accountability: say what you're going to do and then make it happen.

As I've said in other blogs, if you have to have a budget, treat it as a roadmap. As conditions change--like road construction, traffic jams, etc.--adjust your plan. Don't use a budget as a recipe and the only way to cook your results into existence. It's better to use a forecast. Check out the link. Also check out the methodology that SRC makes available through Great Game of Business.

Sunshine tomorrow? You betcha.

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