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Making your forecast more accurate

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Thursday, November 17, 2011

 

BY TOM COX

Today the pressure is on for ever greater forecasting accuracy — margins of error are smaller — yet the variables seem bigger and less predictable. Every business must forecast (or should). Yet over 90% of businesses make basic mistakes that dramatically harm the accuracy and usefulness of their forecasts.

For one firm, fixing just one of these basic mistakes led to a complete change in their sales strategy — and an immediate 28% increase in revenue.

To learn the subtleties of effective business forecasting — why its important, and how to do it better — I interviewed efficiency and effectiveness expert Lynne White.

Why spend the effort to forecast more accurately?

When you’ve shown your banker accurate forecasts every month for a year or more, the bank is more likely to lend you money

You’ll cut waste by buying the right amount of products, supplies, and parts, and you’ll cut overtime by staffing at the right levels

When the firm consistently makes its numbers, morale improves and productivity increases.

Most Common Mistake: Days per Month

Lynne finds the single most common mistake in business forecasts is to estimate 22 working days per month. That’s just not true. Half of all months have fewer — 20 or 21 — and that still ignores holidays, sick time, all day meetings, etc. A realistic number is 18, and Lynne recommends building your work estimates based on 14 to 16 productive working days per month.

Second Mistake: Hours per Day

While we all want to think we’re productive, the reality is the workplace is rich with distractions as well as non-productive yet vital tasks — filing compliance paperwork may not satisfy any customer demands, but you’ll be hard pressed to satisfy anybody if the government shuts you down for non-compliance.

Modern research on office and knowledge workers shows that almost nobody works with full concentration for even an hour. 20 to 30 minutes is more common, with a small break bringing about renewed focus. (I use the Pomodoro Technique to build my focus, in 25-minute blocks, and I find it turbo charges my effectiveness every time I use it.)

Many firms now build estimates and forecasts based on 45 productive minutes per work hour — or 6 per 8 hour day. Lynne argues that even that is too high. Her experience is that 36 minutes per hour is the better metric, leading to more accurate forecasts.

Focus on “What Is” not “What Should Be”

Finding it hard to swallow, that we should really set up plans that assume we’re a bunch of time-wasting slackers? I do. I hate the idea of assuming I am — or worse, giving myself permission to be — 60% productive with each hour, and working barely more than half the month.

Yet it’s vital that we do exactly that. Because forecasts have to be based on what actually is true, not on what we want to be true.

The proof is simple. Use Lynne’s numbers and see if your estimates are more accurate. If you can remain humble and let the data tell you what is, and you embrace what is, you will be far more effective in actually reaching your goals.

Morale Building

I experienced the morale building power of accurate forecasts when I was 15. I was selling Christmas candles door-to-door as a fund raiser for JROTC at my high school — Ballard HS in Louisville, KY. I desperately wanted the jacket that I would earn by selling 50 candles. After walking door to door for three hours and selling only 12, I felt ready to give up. To distract myself I did math in my head. I was selling 4 candles per hour, and on average that was one per 7 doors I knocked on. (You can already see what I at first did not.)

Slowly it dawned on me that I could walk a little faster and knock on more doors per hour. I could try different ways to talk with people to raise my closing ratio above 1 in 7. And even if neither of those worked, as long as my current numbers were good, I could just keep knocking for 9.5 more hours and I would have my jacket.

Suddenly the task seemed much easier. Still big to my 15 year old eyes, but doable.

Now all I had to do was show up, knock, track my hours and my numbers, and be patient. Sure enough, 3 days later I had my 50th candle sold. I wore that jacket for 10 years, and loved it sinfully.

I would never have had the tenacity to follow through, without that forecast.

Got morale issues in this economy, or any economy? Build an accurate forecast and watch morale soar.

Lynne reports that’s a remarkably common side effect of good forecasting. At one supply chain firm she saw the bottom sales person shoot to the top in 3 weeks after the new forecasting system was shared.

Bottom Line

Let go of your ego and use more accurate numbers. Tweak your forecasting model based on the actual data, so it’s accurate, not wishful thinking. And then build your activity plan based on what people need to do — and can realistically do — to achieve your goals. Then stand back and watch your people shine.

(Listen to my interview with Lynne White here.)

Tom Cox is a Beaverton consultant, author and speaker. He coaches CEOs on how to boost performance by building workplace trust.

 
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