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Financial Forecasts; Planning for Uncertainty


Today’s guest blog post is by Jack Malley of Malley & Franey Financial Group, one of the oldest and most successful interim accounting tax and business advisory services companies.

Jack:  My favorite comedian of all time is Buster Keaton.   He is recognized as one of the top 3 silent film comedians, along with Charlie Chaplin and Harold Lloyd.   Buster is also known as one of the greatest stuntmen ever.  Watch the final 15 minutes of Steamboat Bill Jr. and you’ll understand why.

Buster took many risks performing those stunts.  Most of the risks were anticipated and were carefully planned into the films.  For example, judged the riskiest stunt in silent film history is one of Buster’s iconic scenes and is a part of the final 15 minutes of Steamboat Bill Jr.  He is seen standing in the middle of a street during a cyclone when the facade of a house collapses towards him.  Amazingly, Buster happens to be standing where the facade’s open second story window falls and he emerges unharmed.  This was a calculated risk.  Buster and the film crew took measures to minimize the risk of Buster being killed by the façade.  The size of the window gave Buster all of 2” clearance on either side of his body.  A nail was placed at the exact spot where Buster needed to stand.  The façade was a fully-formed, heavy-weight unit so that the movie’s manufactured hurricane-like winds would not blow the building unit off of its intended path.

In business, senior management takes many risks.  They occur during contract negotiations, determining which product to develop, evaluating which distribution channels and markets to pursue, what employees to hire, etc.  These risks, hopefully, are carefully planned within the context of a fully-formed business plan.  One of the results from a business plan is a forecast, usually 3 to 5 years forward.  The plan should have a balance sheet, P&L and cash flow forecasts.  Questions arise as to how much effort needs to be placed in projecting the various elements of the forecast and how frequently the forecast should be updated.

Broadly speaking, in today’s environment, revising the forecast should be an ongoing effort.  In general, the greater the materiality and the higher the variability, or β in stock terms, the more frequent the items should be reviewed.  For example, revenue projections generally fall into this category.  Everything from the 4 Ps to general market conditions should be reviewed frequently.  Like Buster’s nail in the ground, you need to know each day/week where revenues are headed so you can plan everything from inventory needs to headcount requirements and so on.  Other items require a far less frequent review.  Many companies will find that their facility costs will remain static over a long period of time and that their costs may not be that material to the company’s bottom line.

But some risks appear from nowhere and not only to require management to react swiftly but also to have anticipated the incident or its ramifications.  Going back to Buster, in his film Sherlock Jr., he is seen running across the top a moving train.  As he runs out of train, he leaps and catches the chain of a railroad water tower.  His weight causes the chain to be lowered and, with that, water comes pouring out of the spout and knocks Buster to the tracks.  He then gets up and runs away.  Filming was suspended the next two days because Buster was sore and experiencing headaches.  About a decade later while examining x-rays during a physical exam, Buster’s physician asked him when he broke his neck.  At first Buster couldn’t recall any time, and then remembered that Sherlock Jr. scene.

That was a risk neither Buster nor the film crew anticipated.  But senior management cannot ignore planning for an unexpected risk.  Management needs to have a back-up plan prepared in advance for such things as natural disasters, health epidemics and, God forbid, terrorist attacks.  How will you maintain communication with your employees, customers, vendors and those who have financed your business?  Does your business plan have a worst case scenario wherein you plan for a three or six month delay in funding?  What if revenues are cut in half due to economic conditions beyond your control?  These extraordinary events must be “forecasted” and made part of an implementation plan, reviewed with management and then updated periodically.

Steamboat Bill Jr. collapsing facade

Sherlock Jr. railroad water

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Tim O’Loughlin

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