Is confusing Targets with Forecasts holding you back?

By Jeff Robson

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Mixing targets and forecasts is a recipe for potential bias, and flawed, ill-informed decision making

Targets are what an organisation would ideally like to achieve.
Forecasts are what will most likely be achieved.

Targets and forecasts will often be different. It’s not a sign of failure; it’s a key decision-making tool – an indication that that you may need to do something different than what you had planned

However, in many organisations forecasting has become – as budgeting always has been – an intensely political process.

Management cannot treat forecasting as an objective and honest assessment of potential future outcomes when the process is embedded in a political culture around target-setting, intolerance of gaps and annual incentives.

The reluctance to separate forecast from target often reflects management’s fear that if it doesn’t set up overly aggressive targets, managers will fail to deliver.

Successful organisations develop a culture that eliminates the gaming that’s normally involved in reporting of results and forecasts. They accept it’s OK to have a gap between the target and the forecast. To go back to the start – the target is where you would like to be.

The first question should be; “How is the target set?” If it’s arbitrary, for example, growth estimated at 30 per cent next year in contrast to a historic growth rate of 10 per cent, and that’s pushed down to business units, they’ll have wide gaps and may submit unrealistic forecasts to match management’s expectations and demands. Such flawed estimates are not going to lead to meaningful results.

How should targets and forecasts be determined?

Ideally, target setting is a dialogue, and targets are produced over a period of several weeks – in conjunction with the business and the strategic process – to reflect; “Here’s where we think things could head.”
The purpose of the forecast is to generate more realistic, real-time updates and information that will take into account any need for change in order to be able to react quickly and effectively.
If the forecast is not close to the target, that indicates to management that some decisions need to be made.

To successfully separate forecasting and target-setting into two distinct processes you need to get around the forecasting fog into the key drivers of your bottom line.
That means developing a culture that eliminates the gaming that’s normally involved in reporting of results and forecasts. If organisations can’t or don’t do this, management is deceiving itself – maybe until it’s too late.

To find out more about how Access Analytic can help you achieve forecasting and target-setting that will drive effective decision-making accurate, contact Principal Business Analyst Jeff Robson by email or call 08 6210 8500 for a confidential discussion of your individual needs.