Forecasting in an unpredictable world

Indeed, one could argue that the entire 21st century so far is a demonstration. The past 20 years have delivered a staggering amount of upheaval and disruption—from the September 11 attacks in 2001, through wars, natural disasters, the global financial meltdown and subsequent debt crises and now, to cap it all, a global disease outbreak.

Our minds evolved in a world where change moved at the cyclical pace of the seasons. Many of our most important cultural rituals are linked to the slow, predictable shortening and lengthening of the day through the year.

We are geared to expect that each year will be pretty much the same as the last. The industrial revolution changed all that, although our deepest instincts have still not caught up. Will COVID-19 finally succeed in getting us to believe in unpredictability?

If we really believe that our most fundamental assumptions can fail overnight, everything changes. As accountants we’re especially vulnerable—what is the value of all our budgets and forecasts and planning in an unpredictable world?

Right now, the idea of a budget seems almost quaint. How can we make new plans or forecasts today when we’re still in the middle of the pandemic, and the medium- and long-term consequences can only be guessed at? We can try to estimate, but we have nowhere near a comfortable level of certainty.

Fortunately, the tools we need are possibly already out there. Scenario planning, financial modelling with flexible assumptions, leadership and management practices that value agility and resilience—now is the time to embrace them. It’s not easy, because applying these tools and practices properly takes a high level of skill and discipline if they are not to become one-off paper exercises.

It also takes time. If a forecast is to be revisited regularly, people need a few hours of thinking time to do it in; even more time is needed to scan for, consider and digest changes to key indicators, both inside and outside the organisation, that might signal shifts between scenarios.

This is where organisations that have optimised only for efficiency may find themselves in trouble. After decades of building what was tellingly called “lean” businesses, the world may be about to rediscover something our ancestors knew all too well: when the famine strikes, it’s the lean who are the first to die. Maybe we got our metaphors all wrong. What we dismissively called “fat in the system” may turn out to have been the elastic in the bungee cord.

Many smaller businesses, of course, haven’t had much choice, particularly since the financial crisis. But over the next months and years, as the world moves through this crisis towards recovery, we will all need to consider how we organise ourselves to maximise our chances for surviving the next one.



©2024 Sloane



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