When to rely on a forecast or not….

As I write this the sun is shining brightly and the cold damp unseasonal (?) weather we have been experiencing is suddenly a distant memory. OK the stock market is down (again), retail sales are down (again) and Greece continues to teeter on the brink (again). However there is something about a change for the better in the weather that seems to make the world, however fleetingly, a much better place.

Of course businesses are extremely adept at using the weather to excuse any number of calamities. Too much summer, too little summer, badly timed summer (seriously), all are often used to explain away unexpected poor performance. Interestingly weather is very rarely given the credit for good things that happen in business. These naturally are down to the leadership and wisdom of the management team.

Anybody who has ever organised an outdoor event, however humble, knows how it feels to look skywards when the day in question dawns and offer a suitable prayer for reasonable weather. However meticulously you plan the thing, its success or failure is often down to the one thing that is never within your control. All you can do it take precautions to mitigate any downside.

Indeed the only predictable thing about the British weather is it unpredictability. I am sure that the Met Office will be able to provide ample statistics that show that it is right more often than wrong but weather forecasts are only ever just that – forecasts.

The same goes for business planning and forecasting. The chances are you will never get it totally right, but you can stack the odds in your favour by understanding your key profit and cash drivers and modelling a number of scenarios that impact on them. This will help you to assess and manage your risk so that even if it does “rain on your parade” at the very least you already know where you have put your business umbrella.

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Gratuitous name dropping alert (part two). I had lunch last week with a Swiss Federal Councillor, Johann Schneider-Ammann. For those of you who are not up to date with the Swiss political system, the seven member Federal Council effectively acts as the Swiss head of state.

Each councillor is responsible for a number of key portfolios within their departments, unlike our Cabinet Members who by and large only have one. As Mr Schneider-Ammann, whose brief is economic affairs, noted following the recent elections in France, he had to send congratulatory letters to all seven of his new French counterparts! Clearly a good example perhaps of Swiss efficiency…..

Model answers…

2050. Not that far away eh? Alright it is still 38 years away but don’t worry, our banks and their economists are beavering away looking into their crystal balls so that we can start developing our future business strategies. A recent presentation that I attended concluded, perhaps unsurprisingly, that the top 10 economies in the world may not be same by the time we are halfway through the current century, and that countries that have low per capita income now will have the fastest growing economies of the future.

If you are of the opinion that the forecasting records of such experts are less than impressive, then you would no doubt have taken the elements of such an overview which could not be categorised as “bleedin’ obvious” with a sizeable dose of sodium chloride. Nonetheless many corporations lap these things up and focus their resources accordingly.

Obviously the forecasts above were dependent on a number of assumptions based on demographics, availability of resources and capital, and increasing levels of education, democracy and productivity. Oh and they used the history of economic development and applied it to their forecast model. The past is no guide to the future or those who forget history are condemned to relive it? Well you pays your money….

However one constant assertion particularly caught my attention. Although the assumptions might have been wide ranging, the model used was “extremely robust”. Oh really? I presume by this that they meant that it all added up and the calculations worked. I can’t think what else apart from the fact that it also produced pretty graphs and charts.

Having put together a number of forecasting models I know that however good you are at excel, and however many checks and balances you put in place, your output can only be as good as your inputs. If the assumptions are fatally flawed then the model, however robust it is, will be flawed as well. It is vital that everything is questioned and verified, and that lessons from previous forecasting processes are learned and acted on.

Actually when trying to visualise the very long term future, and trying to judge what changes might take place, I find it helps to cast your mind back the same number of years.  The noted music journalist and magazine publisher David Hepworth recently mused that it was 49 years since the first Rolling Stones single was released in 1963, and if you went back 49 years from that point Gavrilo Princip's trigger finger was about to unleash the horror that was the First World War. The inhabitants of 1914 would never have been able to envisage the swinging decade epitomised by Jagger, Richards et al.

To me that puts this whole long term forecasting lark into perspective. Anybody going back 38 years ago from today would have found themselves in 1974. Our intrepid forecasters from that time almost certainly would not have assumed a 2012 of persistent inflation, petrol price hikes, rising unemployment, world recession, and collapsing financial institutions. They might have assumed that we would have learnt from their experiences. The chances of the citizens of 2050 benefiting from us having learned the lessons of our current predicament will tell you more about the future than a “robust” forecasting model will ever do.

Lion taming for politicians…

Ho hum, yet another cheap jibe. Apparently David Cameron doesn’t want the coalition to be seen as a bunch of accountants. Presumably he is worried that the current focus on cuts makes his team look like heartless beancounters rather than the undoubtedly caring and compassionate politicians that they really are.

We should probably be used to it by now to be honest, although that did not stop the howls of protest from the profession’s representatives, with Michael Izza, CEO of the Institute of Chartered Accountants accusing the PM of failing to acknowledge the significant contribution that accountants make to UK economy.

We are still living down the classic Monty Python sketch where a meek and mild chartered accountant revealed to his vocational guidance councillor that he really wanted to become a lion tamer. One of the jokes that circulated when John Major became prime minister was that he was the first person to run away from a circus to become an accountant (although he actually joined a bank, an altogether more honourable calling obviously).

Mind you lion taming is probably an apt metaphor to describe what many accountants in their guise of Finance Directors or CFOs are doing in the current economic climate. We all recognise that a key part of our job description is the use of the word “no”, which often requires a certain degree of bravery when faced with demanding CEOs and business owner managers  

What is also often forgotten is that there is a significant amount of courage required to say “yes” to anything that involves spending money. Firms do have to continue to invest in their products and services, but it takes a lot of sweating over spreadsheets along with sufficient confidence in cash flow management to release those funds. However it is that ability to see the value of such investment and make cash available to support it that separates a proper FD from the sort of clichéd accountant that the PM is presumably referring to.

Courageous, hardworking, visionary, numerate, energetic…hang on isn’t there an argument that says that ministers perhaps ought to be more like, if maybe not exactly accountants, then definitely a bunch of finance directors?

Olympic Ideals…..

We all know the Olympics are going to be a disaster. Clueless organisers, grasping businesses and workers, incompetent bureaucrats, killjoy trademark lawyers, arrogant Olympic functionaries, they all seem to have it in for the biggest sporting spectacle to hit our country since 1966.

The latest shenanigans surrounding the recent passport queues at Heathrow is a perfect example of the potential for this country to become a global laughing stock in the summer. The attempts of the Border Agency (funny how performance seems to have gone downhill since it got a fancy title and a collection of highly paid executives) to dismiss the lengthy waits that many travellers experienced before clearing immigration control recently as a freak occurrence have been dismissed by many in the aviation industry, who are now forecasting many months of misery unless the authorities get their act together.

Naturally everything is everybody else’s fault. Coalition cuts, technology failures, blustery weather, unexpected arrival of passengers (yes I did make this one up) have all been blamed for what happened. There is no sense of everybody pulling together to find a solution. Seemingly we are once again seeing a prime example of Britain’s can’t do attitude.

Or are we? Lest we forget the actual Games were won through the determined efforts and hard work of Lord Coe and his team in the face of extremely tough opposition. They showed the level of drive and effort that is required to make a success of any enterprise. This has carried over to most of the preparation that has taken place, a not inconsiderable undertaking, given the level of construction and refurbishment that was needed to ensure that all would be alright on the night.

By and large the Olympic infrastructure has been delivered on time and within the finally agreed budget. Thousands of volunteers have been identified and are being trained. Countless people are working tirelessly to ensure that these games are a success and have a positive effect on the country as a whole.

We are capable of making things happen in the UK. Enterprising businesses up and down the country show the sort of can do attitude that won us the Games on a daily basis. It would be nice sometimes if these efforts also got some press coverage.   

The original ideals of Pierre de Coubertin who established the modern Olympics may have got lost over the years but maybe we can now find some new ones that will enable us to build on our experiences. The determination to win the Games and then make them happen perhaps should form the basis of a new set of Olympic ideals.

Making sure it really does all add up…..

A tale of two entities. One a public company one a charity. What do they have in common? They both apparently have beancounters that can’t add up! Step forward SuperGroup, home to the Superdry brand beloved by such luminaries as Justin Bieber and David Beckham, and the National Youth Theatre which launched the careers of Dame Helen Mirren and Colin Firth among others.

Getting the numbers wrong is the ultimate accountant’s nightmare. Most of us obsessively check and cross check what we do as well as putting other checks and balances in place to identify possible risks before they turn into real problems. Whenever we read about accounting errors we scurry back to our ledgers to see if there is anything we might have missed.

Clearly this is something that the organisations involved in this case didn’t do. Super Group’s fourth profit warning of the year was apparently down to bad accounting rather than bad business (I have to admit I can’t remember what the reasons for the other three were), one of the problems being that a plus was entered rather than a minus. They’ll probably blame that one on the education system. Meanwhile the National Youth Theatre’s problems were down to an “income stream” being entered into the books twice.

It does not have to be this way. In a small or medium sized business or charity it should be possible to put sufficient early warning systems in place to pick up errors. Whether it is daily cash balances, time sheet data, delivery patterns, production schedules, order books, stock shortages or invoices received and sent, reviewing some or all these activities on a regular basis should give an indication of how the business is doing and any inconsistencies that might exist well before any accounts are produced.

In a larger business checks and balances are more a case of having the right systems and people in place. Dealing with remote operations and staff is a challenge, particularly if you want to avoid micro management from the centre. Nonetheless good lines of communication, regular KPI reviews and tight control and monitoring of cash, allied to a real understanding of how the numbers should work, should provide some protection against accounting errors.

A well run organisation should make it possible to know how well or badly it is doing financially long before any monthly management reports are produced. Good managers who understand their businesses ought to be aware of problems before their accountants tell them. Maybe the blame in the above cases should be more widely apportioned....

Not so Wilde about this Scrooge approach to holidays...

Did you enjoy your Easter break? I hope so because the Centre for Economics and Business Research (CEBR) reckons that our 8 (or 9 depending on royal celebrations) bank holidays cost the UK economy around £19billion. 

It seems that the spirit of Scrooge has clearly moved beyond the festive season and is now pursuing us all the year round. If that is what bank holidays cost, think what the statutory annual leave must cost. Hey, why don’t we go the whole hog and add in weekends?

The only surprise is that this piece of research wasn’t compiled by a firm of accountants because, as everybody likes to believe, those unemotional beancounters are the ultimate business cost cynics, epitomising Oscar Wilde’s dictum of knowing the price of everything and the value of nothing. 

Actually good accountants, in their guise as Finance Directors, do not focus on the cost of everything. They seek to understand how the products and services offered by their businesses create value, realising that this is how real profit and cash is generated.

The valuation of such products and services, and beyond that the valuation of a business for sale, involves a lot more than just looking at the tangible cost elements. As can be seen when valuing houses a variety of factors get taken into account, not just the bricks, mortar, land and other materials.

Invariably valuation is in the eye of the beholder. Most employees see the value in their holidays, which is why they are much appreciated and jealously guarded. I suspect the impact of this value is considerably more than £19billion.

Maybe the issue is that bosses need to take more holidays (cue shedloads of comments about how difficult it is for a small business owner manager to take any holiday). Or perhaps the CEBR should themselves take a break…….

The recession hokey cokey…

You know how it goes. Last week we were in a recession, this week we’re out. In, out, in, out, shake it all about. What’s a poor business to do? In a nutshell, what it does best, as well as it can, and a darn sight better than its competitors.

Working on strategies and budgets with various clients at present, I have been presented with statistics which show this GDP growth or that consumer confidence. It is all valuable stuff but at the end of the day for most small and medium sized businesses it is about developing opportunities and growth based on your strengths and your efforts. It is no longer possible to rely on economic growth to deliver business growth.

That is why understanding your numbers and what they mean for profits and cash flow is so important. If you can do this, you can use your market awareness to put together realistic action plans, targeting potential new clients that are creditworthy and that can deliver real growth. You can also assess current clients and the opportunities that they can present. Of course there are threats to take into account. However strategic financial planning involves understanding and managing risks so you can reap the benefits.

How you view the economy is often dependent on your own personal attitude to life. Do you see the Olympics as a disruption or opportunity? As regards the stock market are you a bear or bull? Do you think an extra day’s holiday for the Queen’s Jubilee is a headache or a chance to create a feel good factor? In short is your glass half empty or half full? Entrepreneurs are inherently optimistic. Finance Directors are less so. This is a good mix for a sustainable future.

The “good times” of the last decade are long gone. The likelihood is that the only economic certainty over the coming months will be uncertainty. We’ve all had to learn how to deal with that over the past few years haven’t we? It is now time for us to put what we have learned into practice to move our businesses forward. Whatever your mood, whatever your disposition, whatever your religion, have a good Easter break and then get stuck into doing what you do better than anyone else.