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Sunday, 11 November 2018

Forecasting the Future? You Can Only Be Wrong or Lucky!!

One of the most contentious issues that leaders encounter is that of forecasting, both financial and generally commercial.

Leaders in business are bombarded on all sides by learned so-called experts with their  strictures on the absolute necessity to plan for the future and no sensible argument can be found against it.

Going blindly into the future is not a very bright idea but it must be accepted that there is a significant difference between planning and forecasting.

Planning involves the generation of an amount of data relevant to the business in the relatively short term, considering it in total and then making some assumptions that can lead to a reasonable level of confidence.

It should be noted that planning and the setting of objectives is done with intention; that is, an intention to give the business a structure for the future however short or long that might be.

The word ‘objective’ in my lexicon implies that which we intend to achieve and is not a forecast except in in a limited  descriptive sense.

The planning process therefore includes assessments of potential sales and income, possible changes in costs of supplies generated from scrutiny of published information, and possible effects of PESTLE (political, economic, sociological, technological, legal and environmental) changes that are outside our control in the wider sense.

It is perfectly feasible, for example, to look at the past performance of the business covering as long a term as makes sense and then use spreadsheet technology to calculate the average change using linear regression analysis.

This will overlay a straight line growth or decline average on the plotted graph and this can be extrapolated to give an indication (and no more) of what might happen in the near future.

The problem then arises as to how much further can this be expected to be realistic.   In general terms given, say, a 3-4 year monthly rolling annual plot of sales it would not be sensible to assume much more than a few months.

Good planning for the future makes absolute sense but it must be constantly understood that the underlying results will always be based on uncertain information, that is, what will the future look like?

On the other hand, however, the very process of forecasting is based far more on PESTLE criteria and as a consequence, is subject to much more uncertainty.

My great friend and top Vistage speaker, behavioural economist Roger Martin-Fagg says with much perspicacity that when we forecast there are only two alternative outcomes; either we are wrong or we are lucky.

Most of the polling organisations in the UK use a weighted sample of around 1,500 respondents to come to what they cheerfully would call a conclusion about voting intentions.

Sampling theory is a science on its own or at least within the science of statistics and it can be shown that after a certain time and number of responses, there is virtually no change in the results.

The clues are in the words”weighted” and “virtually”.  The weighting of the sample covers age, gender, socio-economic considerations and much more and it is obvious that a very minor variation in the assumptions could lead to a major variance in the results.

Accordingly most polling companies publish their finding without mentioning that there may be anything up to +/- 2% error.  Is it any wonder that their conclusions can be viewed with some scepticism.

We are being battered on all  sides by so-called experts pontificating on the malign (they are always malign) effects of what is going to happen in their estimation but once they have pontificated, no-one remembers what they have said and in truth doesn’t care very much.

If I hear another gloomy prediction about the dreadful consequences of a no-deal Brexit I shall have to be very cautious not to want to put a brick through the TV.

Treat every forecast, considered or otherwise, with the respect it deserves.  Remember that it is only guesswork in the end.

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1 comment:

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