It’s something strange about quotations that the memorable
ones get attributed to many people. I used to avidly quote this one under the
misapprehension that it was the insight of Sir John Banham, former head of the
CBI “it is better to be approximately right
rather than precisely wrong.” I recently found very similar quotes
attributed to both JM Keynes and Warren Buffet (I assume Keynes got there
first) “I'd rather be vaguely right than
precisely wrong.” Given these three people must have an aggregated IQ in
excess of 600; they must surely be on to something.
I’ve recently spent a lot of my time pouring over business
plans. The curse of Microsoft Office is that they are beautifully produced, with
great graphics and with incredibly detailed graphs and tables. Most of the
plans are designed to attract investors and are, naturally, optimistic. They
often predict fairly reasonable single percent growth forecasts for the next
couple of years and then suddenly the forecasts shoot up to thirty or forty per
cent growth from 2013 onwards.
Without doubt they are produced by people with MBA’s and other
qualifications I couldn’t aspire to, but I get very suspicious when I see a
Himalayan growth spurt from a business that’s been steadily doing single digit
growth for the last 5 years. Forecasting is one of the most difficult things we
have to do; if we are too conservative, we would never invest and grow a
business, if we are wilfully optimistic, we run the danger of over investing
and going bust.
My concern is that we have too many tools that appear highly
scientific, but in reality, generate rubbish. I am not a statistician by trade,
but I am capable of getting cobbling together a bunch of numbers and using a
spread sheet to produce substantial growth forecast, then factor in the (inevitable???)
upturn in the economy, consumers adoption of new technology and a large slug of
self belief and I could come up with forty per cent growth forecast for a
couple of years time. It’s bound to be wrong, but hey, no one will look back
that far.
The reality is that most forecasts are based on an element
of subjective gut feel. I would argue that a service business would struggle to
make an accurate forecast for more than 2 years. Why? Because the future is
beyond our control; we usually have short term contracts, clients review with
ever increasing frequency and our business performance is dictated by macro
events way beyond our control. Therefore, when I look at a business plan, I
only really give any credibility to forecasts for the next 24 months.
There is a vast difference between forecasts and projections.
My view would be that beyond a couple of years we should only be making projections.
Don’t attempt to be accurate, but describe a series of likely events and make
low and high projections. If you take this approach, you will be closer to
Messrs Banham, Buffett and Keynes, which strikes me as a reasonably good place
to start.
