Last week a major company reported lower than forecasted revenues and the explanations for the miss were pretty slim causing a huge drop in its stock price and market value. Forecasts are guesses and when they are missed, there should be explanations isolating the reasons coupled with guidance going forward.
When we advise clients preparing forecasts we get pretty detailed on how the numbers are determined. Increasing sales by a certain percent doesn’t do it. We want to know what sales will be to what clients in what quantities at what prices and with what delivery and payment terms. If a product is sold we want to know about the inventory, availability of raw materials and production cycle and capacity. If a client cannot explain it clearly to us, how will they be able to justify it to lenders or investors? Hopefully, the forecasts would also be used internally to create budgets, targets, and benchmarks to help guide the growth of the business.
When forecasts are not achieved, the reasons need to be analyzed against the expectations used to develop the forecasts. Once it is evident that the forecasts won’t be attained, new forecasts should be generated as quickly as possible using the new information.
This is not rocket science. It is common sense. Forecasts are best guesses of the most likely scenarios given how the underlying assumptions are applied. There is much talk about transparency – this is Transparency 101.
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