Everyone in business seems to be having extreme difficulty in accurately forecasting in today’s economic turmoil. A recent issue of INC. magazine featured an article titled “Forecasting in a Crazy, Mixed-up World” (April 2009, pp. 19-20).

Readers answered the question, “What is the hardest part of owning a business right now?” The number one response was “It’s impossible to forecast accurately.” Unfortunately, this is true for owners and senior managers no matter what the size of their organization.

It is particularly true for those of you who are preparing for the annual budgeting ritual. At most companies, Financial Planning and Analysis managers are busy developing their upcoming planning points and guidelines.

These inputs will then be used to form the basis for assumptions that will go into the development of initial (or first-pass) budgets. In many cases, the exercise is conducted as if the organization is beginning with a clean sheet of paper. Finally, after countless man hours and a substantial waste of productivity, the annual budget will be blessed and approved as the organization’s Holy Grail by which performance, success, and employee rewards will be measured.

However, the reality for most is that your business is much more like a ship cruising across the ocean. Much of your cost structures are already in place – locations were selected and workforces have been hired, equipment is in place, suppliers located and arranged. The only decisions are those limited to whether staffing levels should be adjusted and whether wage increases need to be granted to maintain comparable salaries.

Even with the tremendous efforts that will go into poring over all the data and responding to the latest forecasts and estimates of future demand, there will be a budget produced and the organization will be expected to start marching toward.

In most companies, all these budgeting efforts are premised on underlying assumptions about the future environment, the levels of sales and related activities, and the expected prices of key commodity inputs. For most, this exercise creates fixed performance expectations. The budget becomes a contract to be achieved. This remains so even as most of the underlying assumptions it was based on turn out to be wrong.

Managers try to protect themselves against this inability to always accurately predict the future by only committing to the minimum thresholds of performance. Hence the budgeting process becomes one of negotiating the lowest acceptable hurdle.

Does your company have a way to continuously update your planning assumptions?

Can your plan flex up or down to meet changing expectations?

And how good are you at forecasting? How do you account for unforeseen changes in the marketplace?

I hope you will join this discussion of a myriad number of issues surrounding the planning, forecasting, budgeting, and control practices. Please let us hear from you. ###