It is well known in the professional financial community how much time, money and resources are expended on strategic plans. The annual strategic planning “season” in a company ushers in an extensive focus on crafting and crystal balling a company’s future financial direction. However, the Plan’s intrinsic value and application for a company can be destroyed, if the underlying assumptions are totally incorrect.
Definition of Strategic Planning
Curiously a conclusive definition of this topic is not easy to find, however Wikipedia’s description is worth remembering … “strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy” (Wikipedia, Strategic Planning, 6th May 2013).
Assumptions – the assumed killer
Clearly the assumptions coupled with the source financial information, which are derived from an accounting system like Hyperion or Quickbooks, are the key drivers of the strategic planning process. Assuming the financial statements are correct, the underlying assumptions in a strategic plan will determine its value. In some businesses or industries, small variances with the forecasting accuracy of the financial projections can have material consequences.
Causes of Incorrect Assumptions
There are a number of drivers of incorrect assumptions.
Wrong forecast data
In the past, financial projections that were overly optimistic were considered simply “overly bullish” – more to the point, they are totally wrong. If an agriculture business claims to produce a 900 gram pineapple (on average), but in actual fact the average is 700 gram and some pineapple can weigh as little as 500 gram, then the 900 gram average is a total lie!
Incorrect application of data
Applying forecast annual volumes or growth rates, where the source forecast data is actually a monthly or quarterly projection, will inherently produce a wrong forecast. Be aware of forecast volumes received from a relevant stakeholder, which are actually documented in ounces (instead of grams) or barrels (in instead of cubic metres). It may appear as an innocuous mistake, but it could adversely undermine the credibility and accuracy of your forecast financial plan!
Irrelevant historical data
Undoubtedly applying historical renmimbi exchange rates in a forecast, given the expected appreciation of the Chinese currency (even discounting Chinese Government intervention) due to increased international trade in renmimbi, is clearly (historical FX data) not a useful metric to forecast a company’s renmimbi-sourced income. This is an occasion to fully utilise content experts such as your company’s treasury or China-based professionals.
Lack of time spent
A strategic plan is a time consuming process, thus spending inadequate time to formulate a company’s assumptions, will evidently result in a poorly furnished strategic plan for a company’s next 5 years. Try to plan ahead of time. This means more than merely commencing the forecasting a month earlier, try to arrange meetings with the relevant stakeholders or business unit heads, in order to seek their council and buy-in with the forecasting activity.
Rudimentary mathematical errors, calculations
Ensure there are comprehensive error or alert checks, which can validate or verify the computed projections throughout the strategic plan. It could be merely referencing the wrong cell in the assumptions, applying an integer instead of a percentage to forecast sales growth, or merely using the wrong unit of measure or form (i.e. grams instead of ounces).
Many strategic plans are well planned, expertly built in a detailed financial model and presented to executive management with summaries, dashboards and graphs. Sadly it is the assumptions that are the assumed killer of the overall strategic plan. The killer of the plan can be wrong forecast data, data incorrectly applied, irrelevant historical data, insufficient time spent with formulating assumptions, lack of detail with the assumptions, and rudimentary mathematical errors and calculations.