UK: Business forecasting - making a start with the future. (1 of 4)

UK: Business forecasting - making a start with the future. (1 of 4) - Forecasting need not be as complicated as the textbooks make out, explains Malcolm Wheatley.

Last Updated: 31 Aug 2010

Forecasting need not be as complicated as the textbooks make out, explains Malcolm Wheatley.

It was H L Mencken, I think, who said that he never made forecasts - especially about the future. He had a point. Forecasting the future is just about the most difficult of all managerial tasks - second only, perhaps, to firing people. And firing people, of course, is often the result of failure to see what is around the corner.

We are not talking about predicting one-off events, such as the Gulf crisis or the date of the next general election. Such matters are best left to full-time followers of the political scene. The question at issue is forecasting at the most mundane level possible: like future demand for nuts and bolts and widgets. This is a task faced by most companies, for selling is a business's raison d'etre. Yet, despite its universality, forecasting remains one of those activities which no one admits to being good at. Why that should be so is a question which leads to some interesting answers. But first let us look at how two, not untypical, companies do their forecasting in practice.

One of them possesses its own tame guru. "Here at Bloggs and Company it's left to the experts - or rather expert. Henry's been here more years than most of us can remember and knows the product line backwards. He's been most things in the company, and now acts as a sort of unofficial right-hand man to old JB. He's not going to go any higher, but he's the sort of chap you want to keep on the right side of.

"All forecasting is really left up to him. He spends two or three days at it every month. Then we all get this 'first cut' sheet sent round for us to make minor amendments. Not that any of us dares, of course. The last thing you want is Henry standing over your desk saying that if you think you can do better, take over the whole thing - as from now. No thanks. Let Henry put his head on the block, I say."

The second company adopts a talking-the-numbers-up approach. "Everyone knows that forecasting is difficult, but here at Amalgamated Widgets we never do seem to get it right. We all have our own thoughts, of course, and it's Tom's job, as sales manager, to collate them and plug them into a 'rough cut' financial forecast with Denis, the FD. I think some of the numbers are pretty good. Young Andrew's got this spreadsheet thing that tells us what we've sold over the last few months, which is a help, but a lot of it just boils down to gut feel and common sense, really.

"But when we all troop into the conference room for the monthly forecast review, old Roger is never happy with the bottom line. He keeps pinning us against the wall to forecast higher sales - which you have to do. So they get plugged into the forecast and we all have to try to achieve them. We never do, of course. There's always this month-end scramble to ship out whatever's in the warehouse - due or not - to make up the numbers. Annoys a lot of the customers, who keep getting stuff they hadn't wanted before next month."

All too many managers will recognise something in these scenarios. Yet there are other methods available. And the fact is that numerical techniques outperform intuition and guesses every time. Even fine-tuning the numerically derived answer will usually degrade its accuracy. So why do companies put up with the sloppy approaches? Glance at the contents page of one of the textbooks on numerically based forecasting and the answer will probably be clear. The treatment is highly mathematical, and full of offputting formulae. What is more, it is essentially theoretical.

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