Little Book of Operational Forecasting #1: What is a forecast?

The is the first of a series of excerpts from the 'Little Book'.

It might sounds like a dumb question, but you would be amazed how often people get forecast confused with targets and commitments, with negative consequences for the quality of forecasts.

The reason I have kicked off the series with this topic, 'What is a Forecast', is not simply because it is the first subject I tackled in the book.

It also illustrates the way in which I like to work, and what I mean by 'radical pragmatism'.

Too often the 'case study' method and what passes for 'best practice' in management thinking is often just plain lazy - using false correlations that yield fake knowledge.

While a lot of sports cars you see are red it doesn't mean that painting your own car red will make it go faster.

While a lot of sports cars you see are red it doesn't mean that painting your own car red will make it go faster.

The only way to make it go quicker is to go back to basics, by asking fundamental questions about the 'scientific' principles that might explain why some things work and others don't.

And only then, once you have credible answers, have the courage to follow them through to their logical conclusion.

This is radical, because you often end up challenging commonly held views.

But it also pragmatic, because knowledge only has value if it can be applied in the real world by normal people.

In this case the question is: 'what is a forecast'?

The answer is that a forecast is the best estimate of what we think will happen (an expectation).

This means that a forecast is a distinctively different thing to a target, which is what we would like to happen (an aspiration).

Indeed, it is the very fact that they are different to targets that makes forecasting worthwhile, since the existence of a gap between the two is a sign that we need to change course if we want to achieve our objective.

Presented in this way the statement appears innocuous.

But, because so much of traditional management practice and behaviour runs counter to this common sense set of definitions, applying these in practice can be deeply subversive.

For example, budgets deliberately conflate targets and forecasts, which means that the budget ends up being a bad target and a bad forecast.

And how often have you heard 'this forecast is not good enough'? Or 'this forecast aren't stretching enough' or 'is this the best you can do?

Worse still, how often do you see forecasts adjusted on the grounds that 'they always low ball/high ball their numbers'.

If these attitudes are widespread in your organisation, what are the chances of your forecasts being honest and reliable?

And if they are not honest and reliable, what are the consequences for the quality of decision making?

If these attitudes are widespread in your organisation, what are the chances of your forecasts being honest and reliable?

And if they are not honest and reliable, what are the consequences for the quality of decision making?

The consequences aren't trivial.

It could mean that you have way too much stock, or too little.

Or that you discover that you are going to miss or overshoot your financial targets way too late to do anything about it.

So, remember:

forecasts are expectations

but

targets are aspirations

and

gaps are normal and a sign that plans need to be amended.