Gavin Cassar’s (Assistant Professor of Accounting at Wharton) latest research is interesting and may confirm a trend that many of us suspected was lurking behind the scenes. The problem is that when preparing business plans, managers tend to be overly optimistic. There may be an inbuilt tendency for us all to be just that little bit too optimistic when looking into the future. How many business plans have you seen painting a picture of pain today, jam tomorrow?
Interestingly, Cassar points to some evidence that the tools used in the budgetting process may actually exacerbate this problem. I have noticed that when ideas are expressed in numbers – financially – there seems to be a hypnotic trance that takes over. Because the plan is expressed in a financial format, the creators seem to believe in it.
To overcome this problem and improve forecasting accuracy, Cassar suggests:
- Don’t just rely on a budgetting system. A good internal progress reporting system is also needed. Used together, these tools can improve forecasting and planning accuracy.
- Go back and look at past experience. Reflecting on the actual past experience of generating revenue may be sobering. I find it helpful to contrast managers’ revenue projections with a robust forecasting model – such as time series decomposition – using actual historic data without any management intervention. The results can help us get back to reality.
- Do ensure that external trends are properly factored into any agreed projections. Do the right research. Get external opinions. Don’t just sit in a darkened room to prepare the plan.
So there is a role for the Balanced Scorecard here.
Firstly, as tool that can illustrate the potential enormity of tasks that are needed to generate revenue growth if a proper correlation exists between the financial objectives and the remaining people, process and customer dimensions. Which really brings me back to a key point missing in many Scorecards – and that is validation of the linkage between Balanced Scorecard measures and actual desired performance. Scorecards only work if you are sure of the linkage between actions and end outcomes – financial performance. Secondly, the Balanced Scorecard makes an excellent performance tracking tool that Carras observes must be used hand in hand with budgetting and forecasting tools.