03 Sep The Implication of a Missed Forecast
The plain truth is that only 1% of companies hit their financial forecast over a three-year period, and only 20% are within 5% of their forecast. Overall, companies were 13% off, impacting shareholder value by 6%
The plain truth is that only 1% of companies hit their financial forecast over a three-year period, and only 20% are within 5% of their forecast. Overall, companies were 13% off, impacting shareholder value by 6%[1]. But that was in the past (the recent past, we might add) when shareholder value was the number one criteria of CEO’s. In the past 6 months, for many companies, the priority of CEO’s has shifted from shareholder value to shear survival, where forecasts can mean the difference between positive and negative cash-flow.
While this issue may not be that important for larger companies, at Oak Island Associates our focus is on firms with annual revenue of $1Bn or less where too many quarters of a missed forecast could spell disaster.
In our world of small to mid-cap B2B providers, a negative impact on valuation could have several “knock-out” implications. To name three:
Company valuation – The value of the company affects the value you and the management team may realize in a sale. So if a company’s shareholders see strategic value in selling to Private Equity firm, the valuation may become a contentious issue when the PE firm is trying to value the company based on 2Q20 numbers and the shareholders would value the company based on pre-COVID run-rates.
Retaining high-caliber executives– In most companies, “perks” like profit sharing and stock options are all but gone for the foreseeable future. Except in rare cases where forward thinking companies have sought creative ways to retain staff, many run the risk of losing top executives to more profitable or financially stable companies. Good forecasting is critical in these times – if your company has developed creative ways of motivating the right behaviors through variable compensation linked to company performance, a missed forecast resulting in severely reduced access to these perks may result in a high level of frustration amongst executives. Losing a key member of the management team during these trying times could do long-term damage.
Employer of choice status – Many could argue that in today’s world, qualified labor is plentiful. Our experience is that firms have done everything within their power to hold onto good salespeople, and have used the downturn to shed “deadwood” in their sales organizations. So the conundrum is that whilst firms have taken this opportunity to “clean house,” attracting solid sales performers is as challenging, if not more, than it has ever been as good salespeople will look at the firm’s financial performance as a significant factor in career decisions. And of course a firm’s ability to forecast accurately, using objective methods, is something most good salespeople can relate to. The converse is true that good salespeople will “sniff out” a company’s inability to forecast accurately, resulting in a roller-coaster of reactionary management, which most good salespeople will choose to avoid.
In summary, firms that are able to accurately forecast, even in ranges, and especially in these uncertain times, will be far more attractive to PE Firms, high-caliber executives and the best sales talent. Not to mention ensuring positive cash flow to survive current market challenges.
If this article interested you, the next in the series is “The Root Causes of Missed Forecasts”.
[1] HBR: The Forecasting Sweet Spot Between Micro and Macro