Why do Forecasts Fail?

Hubris and poor assumptions will do it every time.

Forecasts, in many cases are nothing more than an educated guess, someone’s gut feel. Sales projections and margins used to calculate outcomes are the starting point to make the model achieve the target goal, whether these are realistic or not is not the forecasters responsibility or goal.

I’ve run sales in major corporations and have frequently had sales and gross margin targets imposed upon me that bear no resemblance to the market we were operating in. The goal of such forecasts, that are doomed to failure, is usually to keep a hostile board at bay and hide the fact that things aren’t going as well as they should be or that the business isn’t being run as well as it could. You probably get to fire the sales guy twice before that argument doesn’t work anymore and questions are asked about how the business is run on a wider front.

To take them beyond this and make them more meaningful guides to drive your business its important to run multiple scenarios, in setting sales/revenue targets there should be a worst case, mean and stretch scenarios that can be used to see how far you can go with the business or what is the worst case you are going to have to survive.

If things look comfortable on your worst-case scenario then you probably have a mature business with predictable revenue from multiple long-established customers. Worst-case will show a small decline in revenue from your existing base plus very little growth from new ones. The mean forecast will be just steady as she goes projecting historic growth forward with potentially some tweaks for saturation of certain markets and growth in others. Stretch will be just that, if things go very well and the stars align for your business and your products then this is what it could be.

Start-ups tend to operate in permanent stretch as they have the unusual mix of no historic data, a combination of inexperience, optimism and hubris. I’ve never seen a start up that hit its forecast.

So, how to make your forecast more accurate and a real tool to manage the expectations for your business.

  1. Avoid inaccurate or false assumptions, easier said than done, but when preparing a forecast its easy to skim over this key part of the process.
  2. Focus on historic data and the forward extrapolation of that data.
  3. Be realistic and consider the effect, market changes or the wider economic impacts will have on your business, test these with thorough scenario planning.
  4. Don’t ignore fundamental changes to your market, there are many things out of your control, such as exchange rates as a very simplistic one or to be current perhaps you will have to pay duty and wait longer for your goods from a supplier in the near future and this needs to be factored in.
  5. Hubris, don’t get carried away because you had one good quarter its much better to over perform than over promise.

No forecast will ever be accurate, so the real test is the scenario planning, which should provide a wide range of realistic outcomes and understanding that as the forecasted period progresses how various events and circumstances will affect your business.

ProForecast allows the user to run multiple “what if” scenarios to allow them to stress test a forecast and produce a realistic set of outcomes for your business. This will assist you in solidifying your strategic planning for the future and allow you to react to events as the forecasting period unfurls.

If your like to learn more about how Proforecast can be a key tool in the development of your strategic plan then visit us at www.proforecast.com book a demo or give us a call.

Mark Harrison

Chief Commercial Officer – ProForecast