If I had a pound for every hour I've spent forecasting and revising forecasts, the total sum would be greater than the value created by the forecasting itself. It's an activity that is at best useless and at worst actually counterproductive. Here's why.
Opportunity cost. Time spent forecasting is time spent not doing something more useful, such as selling, collecting cash, or thinking about how to make more money next year. All these activities show a clear return on time invested; forecasting doesn't.
Politics. Forecasting is a largely political exercise. It's not what we think will happen, but what we think is the minimum we can get away with offering - fine if you enjoy such games, but the danger is that someone might take the result seriously and base plans on it.
Impaired commercial peformance. If we are behind forecast, we resort to creative accounting or 'fire sales' to generate last-minute revenues, at the risk of profitability. If we are ahead, we may even actively delay sales simply to produce the expected result. I know - in one of my jobs (FTSE-100 company), I was criticised for producing results significantly ahead of forecast. What sort of message does that send?
Finally, forecasting nourishes the dangerous delusion that we know what is going to happen. We obsess over whether a £10,000 cost will fall in this year or next, yet we would struggle to forecast revenue to within £100,000. In fact, we obsess over the small uncertainty on cost precisely so that we can ignore the bigger uncertainty on revenue. This is forecasting as displacement activity, and it's very popular.
Stop forecasting, embrace uncertainty, and start managing. The results may surprise you.
- Alastair Dryburgh is head of Akenhurst Consultants - www.akenhurst.com