29 Sep Ouch! A Missed Forecast Impacts Talent Retention AND Investor Confidence
When revenue forecasts are wrong, organizations lose both the war for talent and the battle for shareholder confidence. Even though the damage wrought by inaccurate forecasts is obvious to most corporate leaders, only 9% of companies achieve forecast accuracy rates of 5% or better. No wonder there are so many surprises in the market these days.
One of the main reasons for this pandemic of inaccurate corporate forecasts could be a shift in leadership priorities; During and after the COVID-19 shutdown, many chief executives were forced to focus on cash-flow emergencies during the rapid, unexpected economic shutdown.
Understandably, concerns about shareholder value and corporate culture took a back seat to fears about survival. With so many novel outcomes and sudden changes (eg. the fast shift to remote work and the surreal rise in new business formations), executive leadership had little choice but to base future numbers on pre-COVID runs. After all, how could anyone imagine a more unusual circumstance than the COVID pandemic of 2020-2021?
Failure To Forecast Accurately = Failure To Achieve Fair Valuation In A Sale
If a Private Equity (PE) firm is trying to assess value based on 2020 numbers while shareholders base their numbers on pre-COVID run rates, the valuation may become a contentious deal-killer. Let’s face it – PE has never based sales prices solely on traditional valuation models. In addition to the most recent year of normalized profit, PE companies are now carefully evaluating the present discounted value of a firm’s future cash flows to balance the sudden shudder created by the first half of 2020.
At Oak Island Associates, we work with small to mid-cap B2B providers (firms with annual revenues of 1 billion dollars or less). In our world, a negative impact on valuation could have several “knock-out” implications including lost profit opportunities in a potential sale, a high-caliber executive hire, or an acceptance signature from an up-and-coming sales superstar.
Inaccurate Forecasts = Lost War For Talent
Inaccurate forecasting is essentially a big lie that can hurt your sales organization in two ways – either you or your employees get less income & opportunity than anticipated.
Even though money is not the sole motivator of top talent, compensation packages and opportunities for more income are critical in retention and recruitment efforts. In addition, the only way to manage variable compensation & other executive and sales performance perks is to forecast accurately. After all, if you fail to predict revenue amounts correctly, you are likely failing to predict profitable, effective compensation amounts as well.
The financial health of a business depends on leadership’s ability to attract & retain the best salespeople & executives, who do not thrive or say yes to a job offer amidst chaotic survival attempts or overly optimistic revenue projections.
The Impact of Forecasting Too High or Too Low
Remember when you thought the shutdown would last three weeks? Or the relief you felt when the vaccine arrived to save us all?
If your forecast is overly optimistic, you’ll be scrambling to meet the expectations of your best salespeople and your most important investors.
Now, think back to when you thought the shutdown would destroy the economy and sink the country into a depression, or at the very least a great recession. While the recovery is not over yet, and there are plenty of serious impacts, the worse did not happen economically (and the worse is not likely to happen anytime in the near or future). You probably know that individual net worth rose during the unexpected housing and stock market boom, but you might be surprised to learn that new business formation exceeded all expectations. In fact, new businesses filed paperwork at the highest rate ever recorded.
If a financial forecast is too low, then your business is likely to be crushed by unanticipated demand. As customers fail to receive goods and services as promised, top talent looks for more predictable experiences. In addition, you might promise higher variable compensation rates based on a too low revenue forecast which then feeds into unrealistic employee expectations of revenue in the future.
Accurate Forecasts = Satisfied Shareholders, Executives, and Sales Talent
During uncertain times, high-caliber executives and top sales talent will stay and even say yes to a job offer when your company provides accurate reassurances about the future. Boards of Directors and PE firms can agree on a fair value when both sides are basing their numbers on comparable data sets. All of this boils down to the plain truth – Accurate forecasting is the result of an accurate, current assessment, which requires a steadfast commitment to fact-based modeling.
A missed forecast is not the only reason employees become disengaged, or the sole reason valuation is difficult. But accurate forecasting, which results from accurate assessments, will set your business on a faster path to success.
To learn more about how to enhance your corporate forecasting models, contact Harry Dunklin at Oak Island Associates.