Over the past few months, the team at Great Game has had the opportunity to chat with several different folks in the Open-Book community. During my own conversations, I made a surprising finding; on more than one occasion, the person let me in on one key activity they were neglecting: forecasting.
Many of you would agree that forecasting financials in business is a vital part of your Huddle meetings and annual planning. However, there are probably others that would share that you don't forecast at all.
This prompted me to dig up a classic Q & A with some fantastic advice on how (and why) you should shine up your crystal ball in 2011. Take a look at the questions below!
Q: “We have a plan, but we’ve never done any forecasting. Where do we start?”
A: “Forecasting is like any other organizational skill; it needs to be learned,” says John Case, author of Open-Book Management. “Often the best way to learn is to plunge in.”
His advice: First get together your management team and make a list of the key variables in your plan—sales, margins, whatever. Assign responsibility for each number to one or two people. Talk over where people can get the information they’ll need to make a good forecast. Ask them to come to the next meeting with a forecast for the following week or month, depending on what makes the most sense for your business. “When we started forecasting, we did it weekly so people could get used to preparing the numbers,” says Mike Kudryk of ACuPowder International. “Once people got the hang of it, we moved it out to twice a month.”
Q: “We have no plan. Should we start forecasting anyway?”
A: Sure. “A forecast without a plan is like a compass without a map: it tells you where you’re headed, but you don’t really know whether it’s the right direction,” explains Case. “But you have to learn to forecast at some point anyway, and the experience will prove useful when you do sit down to prepare a plan.”
Q: “We’ve started forecasting, but our forecasts are usually way off; what should we do?”
A: Practice usually makes perfect, or at least leads to some improvement. If it doesn’t, you have to analyze where and why the discrepancies are arising. “Maybe people aren’t understanding the numbers,” offers Kevin Ruble, who runs an open-book transportation company. “Maybe they’re misreading historical data, or missing trends. Maybe your assumptions need to be worked on.” Alternatively, Ruble adds, people may be just “tossing out the numbers” knowing that senior management isn’t really listening and isn’t going to do anything with them. “Then you have a morale problem: there’s no reason for anybody to care.”
Q: We have a feeling our people are sandbagging their forecasts by giving us numbers they know they can hit. What can we do?
A: It’s a time-honored trick of corporate maneuvering: give management a forecast that’s worse than you expect, so that when you exceed it you’ll look like a hero. Salespeople are usually the worst offenders. But plenty of other people—plant managers, accounts-receivable supervisors, whoever—indulge in a little sandbagging now and then. It isn’t a big problem in companies where forecasts are compiled and promptly forgotten. But open-book companies typically involve employees throughout the organization in creating and tracking forecasts. If someone is consistently off, it doesn’t really matter whether they’re over or under. It screws things up.
Case’s advice: Hold people accountable for what they say they’ll do, and don’t reward them for doing better. Sure, unforeseen opportunities will crop up. If they do, they need to be discussed among all the relevant departments. What are the costs of deviating from our plan? Is this particular opportunity worth it? This discipline can save companies from going off half-cocked after new business.
Q: Any other useful techniques for forecasting?
A: It’s wise to start forecasting initially in a group setting, so that people can learn as they go. Start with the management team, and involve other people gradually. Keep the meetings tightly focused on the key numbers. “Forecasting meetings should be highly disciplined,” advises Bill Fotsch. “They should be at a specific time of day, the same day, every week or two weeks. You’re making a commitment: no matter what, all the numbers will be covered.” If forecasts are inaccurate, he suggests meeting more frequently until people get the hang of it.
Once they do get the hang of it, watch out: the numbers will begin moving the way you want them to. “It’s one of the most powerful management processes I’ve ever seen,” says Fotsch.