Kevin Phillips wonders how to create meaningful financial forecasts today, when everything changes, all at once, and all the time.
Twenty-five years ago, a small book about mice searching for cheese in a maze became an unlikely business phenomenon. Spencer Johnson's "Who Moved My Cheese?" spoke to a generation of traditional businesses seeing their world change thanks to the dot-com boom, globalisation, and technological upheaval. Its message was simple and reassuring: anticipate change, adapt quickly, don't waste time asking why things aren't like they used to be, and don’t cling to old ways of doing things.
Arguably, the changes at the start of the Millennium were (once we made it through Y2K) seismic but relatively straightforward: from physical to digital, local to global, manual to automated. For the mice and humans in "Who Moved My Cheese?" the challenge was making the change. Once they had done that, the cheese didn’t keep moving.
We all know the iconic stories of the businesses that didn’t notice their cheese had moved. Blockbuster didn’t see the threat from streaming, Kodak misjudged the impact of digital photography, and BlackBerry doubled down on smartphone keypads when the world was embracing touchscreen.
Today’s disruption feels different though. It feels unpredictable, chaotic, and random. And never-ending. How do you anticipate change when disruption behaves like this?
How do you forecast chaos?
But this isn’t an article about business disruption. It’s about how we run our businesses, and help our clients run their businesses despite the disruption going on. And specifically, it’s about the bedrock of financial planning: the financial forecast.
Without a sound financial forecast, how do you, as a business, set goals, allocate resources, and be ready to tackle opportunities? To be sure, I have spent a lot of time in previous articles discussing the need to be agile and flexible, and to have the processes in place to turn on a dime (or a penny) and react to changing circumstances.
In today’s world, however, it might seem like you are facing new circumstances on a daily, or hourly basis!
The question now becomes, when do you adapt your forecast, and when do you hold steady?
Is the world really that random?
As businesses, we face a more turbulent and random world than ever. And thanks to globalisation and how interconnected we are, it truly is the case that when, for example, the US sneezes, the rest of the world catches a cold.
Consider the new US president’s comments, in the run-up to the election and inauguration, about implementing sweeping trade tariffs. On the face of it, a UK company might think this is irrelevant to them if their customers are in the UK and Europe. But if their core components come from the US, or a supplier who relies on US exports, and if the UK imposes retaliatory tariffs on the US, it suddenly has a very material impact on their business. Suddenly a seemingly disconnected trade policy has a direct impact on their supply chain costs.
History can’t predict the future
This interconnectedness makes traditional forecasting models increasingly unreliable. Historical data struggles to account for unprecedented scenarios – from climate volatility affecting seasonal demand, through a global pandemic, to geopolitical tensions disrupting supply chains. When your procurement system suggests ordering your winter stock of, say, woolly hats based on previous years' data, how do you factor in increasingly unpredictable weather patterns, or low-cost, on-demand fashion providers from China impacting retail trends at an ever-increasing rate?
A typical response is to balance quantitative models with qualitative insights. This balances out contextless, over-binary arithmetic and algorithmic formulae with information from the coalface of the organisation. To do this, you need a way to quickly and effectively capture insights, observations and even gut feel from the grassroots of your business. Yet paradoxically, when uncertainty rises, many businesses centralise decision-making and reduce input from their operational teams – precisely when coalface insights are most valuable.
Navigating the future
How do you navigate forecasting today? I’d suggest the key question is: how do we balance responsiveness with utility? A forecast that changes weekly might be agile, but it loses its value as a planning tool. Conversely, rigidly maintaining outdated projections in the face of clear changes helps no one.
There is no doubt, however, that in today’s business environment teams need to be able to tweak forecasts in response to changing conditions. Leadership can maintain visibility of these changes on the ground through exception reporting. Version control becomes more important too, providing multiple checkpoints that allow financial managers to identify when and why changes took place.
Redefining a good forecast
But perhaps we need to fundamentally rethink what constitutes a "good" forecast. Instead of aiming for precision, we should focus on identifying ranges and decision points. Instead of trying to predict exact outcomes, perhaps we should concentrate on understanding the relationships between different factors and their potential cascading effects.
How are you tackling this challenge? Are you encouraging clients to stick with tried-and-tested methods, or are you exploring new approaches? What guardrails have you put in place to prevent constant flip-flopping while maintaining necessary flexibility?
Navigating the maze
Today's challenge isn't just finding new cheese – it's understanding that the entire maze keeps changing. Perhaps the most valuable forecast isn't the one that proves the most accurate, but the one that best helps us prepare for multiple possible futures.
The trick isn't predicting exactly what will happen, but building the capability to respond effectively to whatever does happen.
As published in AccountingWeb - January 2025
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