Range Forecasting: the benefits in times of uncertainty

As any business-minded person knows, cash is ‘king’ (or ‘queen’, perhaps). The COVID-19 context demonstrates this clearly, and it also reinforces the point that a simple ‘single point’ cashflow forecast based on a system/technology that looks at trends simply won’t work. Uncertainty in the world around us makes life for the treasurer very challenging indeed.

It’s clear that cashflow forecasting is critical, more so possibly than any other form of forecast for the business, and one’s assessment of the level of accuracy of a forecast will determine how much ‘buffer’ cash is needed at any time. A technique which can help in this is called ‘range forecasting’, developed in my Unilever days and applied since then to all kinds and sizes of organisations. This doesn’t require complex systems, though they can be integrated into the process. It requires knowledge of the business, and discussion with colleagues. And although I have applied it in the past to P & L forecasts, it can work equally well when translated into a cashflow forecast.

So, instead of asking colleagues what their forecast for the period in question is (you may have annual forecasts or indeed rolling, and are likely to updated them at least once a month), and they come back with one number, and possibly some risk and opportunities around that number, you ask the questions: How good could it be? and How bad could it get? This gives a range, and in discussing that range you really start to understand the risks and opportunities of that part of the business. You then discuss what is the most likely outcome, and that point is unlikely to be right in the middle. This forms a statistical probability curve, and you can add up the different parts of your business and then cut off the outlying parts of the overall curve to come up with a reasonable range of outcomes.

You can also introduce a peer review process, which works when you have a portfolio of businesses or business areas, where the group can pose questions and challenges to others’ numbers. This, when working, can be very effective – you are not the sole person asking the questions, and the diversity of the group can bring out more interesting and innovative approaches. It’s also a great opportunity to share insights from one business area with another, as well as different skill sets and ways of thinking.

The beauty of this process is that you start to really understand the risks, opportunities and likelihoods. You break down some of the behavioural barriers such as those within departments who are always over-optimistic on revenue, or alternatively constantly ‘low-balling’, as well as those who overstate costs so they can keep their own contingency. My experience from large multinationals in the past demonstrates that unless there is a behavioural shift, you can be faced with contingency upon contingency, which leaves you to second-guess others to get your forecast in a reasonable state such that you can rely on it for decision-making, - and this can be a dangerous game. It is of course particularly difficult in a period of change, when you aren’t quite sure whether someone is taking a new approach (i.e. no contingency), but to mitigate that risk the conversation has to be even more open and honest. Another benefit to the process is that you get to know your business even better, and you thereby further gain the respect of your colleagues.

You can implement this in full, or alternatively use elements to ensure you are having the right discussions across the business – and in times of great uncertainty these conversations are invaluable. The forecast is taken from being ‘just a set of numbers’ to an enabler for a better understanding of the drivers behind the performance of a business. And bringing people onboard with an open discussion as to the real risks and opportunities can create a sense of teamwork, where the power of a diverse group of thinkers really can come into its own.


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