Business forecasts are reliably wrong: but still valuable

One of the most prominent founding fathers of the United States of America, Benjamin Franklin, once wrote: if you fail to plan, you are planning to fail!

This is one of the corner stones of any business. From SWOT analysis to Independent Business Reviews, to forecasting, looking ahead to the future and planning for an eventuality is a business function that many companies commit a lot of capital (monetary and human capital) towards.

While forecasting is necessary, it is important to note that it is not an exact science. I’m sure any business that tried to predict the disruption that they are currently facing have failed horribly.

I recently read an article on the Harvard Business Review which makes this point, but also adds that while this is not an exact science, it is a necessary exercise.

Ask the right questions
The article points out that business forecasts are often wrong; and yet they can still be a powerful tool for smart leaders if they look at them in aggregate and ask the right questions.

At the beginning of every year, while many people make resolutions for the new year, organizations make predictions for the coming year. Both have a high fallibility. Forecasts are predictions about what will happen in the future based on information currently available. As such, they are exercises of the imagination, which studies have shown are rarely correct in their particulars.

The article adds that, despite being reliably inaccurate, smart leaders can extract strategic value from forecasting. When judged in total, they capture the zeitgeist. We just need to ask the right questions: what do experts find important and likely enough to predict? What do they agree with, and more interestingly, where do they disagree? Even if forecasts are specifically wrong, what do they indicate about the underlying trends and critical issues?

After two tumultuous years of the Covid-19 pandemic, as the world looks ahead to what could become the new normal, it is a particularly important moment to assess our views and hopes for the future. The study of past global pandemics and other crises tells us that the post-pandemic world will likely look significantly different, but how?

We conducted a meta-analysis of certain predictions for 2022 and beyond by leading commentators and opinion leaders on business.  The article describes some of the more prominent themes and offers an interesting view on how companies can use these forecasts to gain perspective and advantage.

What the forecasts predict for 2022
The article points out that more than half of the forecasts we reviewed offered forecasts caused or accelerated by the pandemic. But are these changes here to stay? Some, such as macroeconomic uncertainties and labor/raw material shortages, are expected to return as the pandemic subsides. Others, such as the accelerated adoption of digital business models, reflect how the pandemic has changed the status quo.

Perhaps unsurprisingly, the predictions with the greatest divergence are those relating to complex emerging phenomena in social, economic and political systems, such as whether we are heading for a period of more or less globalization, inequality or polarization.

Here are some forecasts about what we may expect in the business and financial sector:

• pandemic scarcity of raw materials and labour will initially leave supply chains vulnerable but will return to normal as businesses and consumers adapt;
• the labour market will remain tight due to pandemic-induced layoffs, a reduction in the workforce and attrition due to increased worker mobility will become common place;
• companies will increasingly use technologies such as artificial intelligence, machine learning and automation to:
• meet demand in the face of labour shortages,
• adopt adaptive manufacturing technologies, and
• develop new solutions to customer challenges;
• consumers will expect personalization and companies will use technology to create personalized experiences on a large scale.
• flexible operational models will continue to exist, especially for knowledge workers, as more than 90% of employers have plans for a hybrid work models for knowledge based  workers;
• inflation will remain high in 2022, even if central banks raise interest rates in anticipation of the adjustment of the economy, labour and supply chains. Their focus will be on avoiding a wage-price spiral;
• after two volatile years, meme stocks (a stock that gains popularity among retail investors through social media) will fade, and market valuations (especially in tech and biotech) will realign with business fundamentals; and
• digital and cryptocurrencies will increase because central banks are introducing their own digital currencies.

Addressing current risk
It must be pointed out that business forecasting is necessary when addressing future risks.

A company’s failure to accurate predict these risks has nothing to do with lack of skills but has a lot to do with the level of disruption that we are seeing in the current environment. Covid Came without any warning and the level of disruption came in the form of a tsunami rather than a flood. A number of companies that are currently in distress are well run companies that simply could not predict what they would face in a year or two’s time.

This has placed many companies in financial distress which is a current risk. When addressing these risks, companies need to ignore forecasting and turn towards SWOT Analysis and IBR’s. this will give the company a 360° view of the company and the elements that placed the company into financial distress. This will allow companies to address risks such as:

• cash flow management;
• turnover;
• agility;
• alternative operational models;
• addressing the global supply chain crisis;
• sourcing alternative raw materials;
• stock management;
• lead times on product delivery
• debtor and creditor management; and
• accounts receivable vs accounts payable

At times it is also advantageous to do business forecasting and then use that to frame your SWOT Analysis and IBRs. A classic example of this is the economic reform that is desperately needed in South Africa. President Cyril Ramaphosa has already indicated that private companies will play a major role in driving this economic future and that the hydrogen economy will be a key project as South Africa moves towards Net Zero.

The role of BRPs
One of the reasons why companies fail at business forecasting is that they are not trained in it, or they look at it solely within the context of their business. BRPS and Turnaround Professionals adopt a more holistic view when it comes to forecasting. They look at it beyond the four walls of a business.

As informal restructuring becomes more popular, business forecasting will be a skill that many companies will need. This demand creates an opportunity for BRPS and Turnaround Professionals to play a meaningful role in turning businesses around or diversifying their operational models to take advantage of the economic future that South Africa wants to create.

Robin Nicholson is a Director at Corporate-911 and is a Senior Business Rescue Practitioner