Forecasting Mistake Number 1: Forecasting to the Wall

In today’s session at CFO Magazine’s 2011 Corporate Performance Management Conference, speaker and author Steve Player, of The Player Group and North American Director of the Beyond Budgeting Round Table, brought out lots of valuable information about the need for organizations to move from a once-a-year, top-down “budgeting” process and into an ongoing process of rolling forecasts.

In doing so, he employed a striking analogy.

Player asked the attendees: Would you be happy with a new car, if, when you first bought it, the headlights gave you a good view of the road ahead—shining out maybe a 600 feet ahead of you. But after three months, the headlights only gave you visibility for 450 feet; and after owning for six months, the headlights only showed you 300 feet of the road before you?

Of course not! No one wants a car like that.

Nevertheless, that is precisely the kind of performance being actively supported with the function of traditional methods of budgeting and forecasting. First the company is looking forward a full twelve months. Three months later, the company is looking only nine months into the future. And, after another three months, their view into the future—their forecast or their budget—gives them only six months of guidance.

What is worse is the fact that the one-year forecast was likely put together from statistics collected and judgments made three to six months earlier. So, by the time the firm’s forward-looking view is obscured beyond six months, the six months they are seeing in the forecast is now nine to twelve months old and out-of-date.

Is it any wonder that such a firm’s “budget” is considered little more than a well-intentioned joke—or perhaps just something to satisfy the executives—by the workers who are all too frequently being measured against the budget?

Steve Player calls this approach “forecasting to the wall,” where no one has a clear vision beyond the 12-month “wall.” He also calls it, “Forecasting Mistake Number One.”

Forecasts, when used, ought be updated as often as necessary; and certainly every time there is a significant change in the mathematical, statistical or intuitive elements underlying the existing forecasts. Forecasts should also be rolled into the future far enough and frequently enough to allow the management changes they are intended to guide to take effect for driving ongoing improvement.

“Mistake Number One” – Think about it.