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The Trainwreck That Is Financial Forecasting

Two addtional articles in today's Wall Street Journal, "Target Says Price Cut Vital" and "Retail CFOs Wrestle With Inventory as Hurdles Persist" shine further light on the forecasting woes faced by retailers (it actually applies to almost all companies, it just shows up more visibly and quickly at retailers).

The common excuse running through both pieces is that retailers failed to anticpate two things:

  1. The speed with which supply chain backlogs cleared

  2. The speed with which consumer spending patterns changed

Blame was also assigned to long order lead times whereby retailers have had to place orders far ahead of selling seasons to secure product.

It all sounds very reasonable, after all the future is by defintion unpredictable. But is it excusable? The CEOs and CFOs of these companies are paid many millions to avoid just such mistakes. They have in turn invested tens of millions in technology to provide data to populate ever more sophisticated alogrithms and models that continue to deliver bad outcomes.

When will the business press (yes, Wall Street Journal and Financial Times, I am talking to you), board members and investors call foul? These excuses have been around for decades and everyone nods their heads and meekly accepts them. Executives are only too eager to pocket the rewards of success, but what are the penalties for screwing up what is probably the most important role of management--the optimal allocation of resources to optimize FUTURE business performance?

There is a need for accountability that in turn leads to a fundamental rethink of how business performance is forecasted. The future cannot be predicted with precision, when will we recongnise this and treat forecasts with the scepticism they deserve?


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