Accurate forecasting is key to corporate survival

We can but hope that the government’s move to throw countless billions of
pounds at the financial system will help stabilise things a little. But this
will not prevent the now-inevitable recession and finance directors will have to
up their game if they want their companies to survive.

Over the next year revenues will tumble, cash flow management will be tricky
and credit will remain a sought-after commodity. Banks and investors will be
interested only in those companies that can demonstrate complete understanding
and control over their business and its finances.

Lost art
Key to survival will be the quick remastering of essential forecasting and
budgeting skills that may have been downplayed in the boom years. When a rising
tide lifts all boats, it generally matters less if the projections were
accurate.

“During the recent times of plenty, forecasting became a pretty routine
exercise,” says Neil Wolstenholme of
Ineum
Consulting, part of Management Consulting Group. “Not enough
thought or attention went into forecasting and it was too heavily emphasised on
the profit and loss account.” Companies paid less attention to operational
drivers that impact working capital, capital expenditure, and cash flow, says
Wolstenholme.

Even those companies that are still doing well are struggling when it comes
to finding new finance. The banks have no stomach for risk and are demanding
much more detailed forecasts. But the skills to provide these detailed forecasts
have been eroded over time. One of the most common problems Wolstenholme
encounters is with companies that are reasonably good at forecasting demand and
translating that into top-line revenues, but are not so good at calculating the
impact this will have on production costs, inventory levels and trade
receivables and payables.

Companies need to spend as much time forecasting costs as well as sales, says
Wolstenholme. “Rather than the marketing team sitting in isolation and coming up
with their sales forecast, they need to get together with the production guys
and those who manage the supply chain,” he says. “Then they can come up with a
realistic forecast that will allow the most efficient flow of goods onto the
market to manage working capital as well as possible and protect the company’s
cash flow.” He adds, if a little implausibly, “Working capital management is
sexy again.”

In from the dark
Finance directors need to drill into the details of their business and delve in
the depths of the IT systems to ensure they provide the right data. If the data
does not flow smoothly from the production to the sales systems, it could take
days to reconcile and the company would be left in the dark.

For many mid-level managers the rapid change in global fortunes will be
especially tough as they have never experienced such turbulent times and often
lack the basic vocabulary.

Peter Urey of
Fearless
Consulting says that, in his career, “the cardinal sin was to foist
surprises onto my superiors and as a marketeer I made sure that I lived in the
pocket of my FD.” The problem he often finds is that “when I get a group of
managers together they can have real problems grasping simple business concepts
like stock turns and margin.”

That’s one reason why Miranda Lane, managing director of the financial
training company LearningFinance, has seen a rise in demand from companies
wanting to educate those who have control over budgets but do not come from a
financial background. “They need help with forecasting costs and revenues and do
not understand the impact their decisions can have on the cash flow and balance
sheet of their company,” she says. “We stress the importance of operational ge
aring and why it is vital to be able to react quickly to a product line that is
not selling as well as anticipated.”

But despite the undoubted benefit of having line managers who can help extend
the company’s forecasting horizons, many companies may find themselves in a
catch-22 situation. As Wolstenholme puts it, “They will have to teach their
staff new skills as well as devote more management time to detailed financial
forecasting just at a time when they want to cut costs.”