Plans, Budgets, Forecasts & Causality

One day, back when I was a controller for a group of manufacturing operations, I sat down with the president of my operating group – a curmudgeon on the surface, but actually one of the kindest and most honest men you’ll ever meet – to go over our forecast for the upcoming six months.  The forecast was not as good as had been hoped earlier in the year.  After studying the forecast for a few moments, the president said, “Damn it, Doug.  If I get fired, I want it to be because of an actual, not a forecast.  See if you can do something about it.”  Then, with a wry smile, he said, “I’m sure either you or your successor will be able to make it look better.”  Of course, I put my truth-stretching skills to work to develop and rationalize a more positive forecast.  After all, I loved my job and wanted my group’s president to keep his job as well. 

This was just one of the many events during my career as a controller that led me to the conclusion that plans, budgets, and forecasts were not the valuable management tools I was taught about in college.  Instead, they were either mechanical rituals whose purpose had been long forgotten or political documents designed to help business executives keep their jobs.  Although spoken as a joke, the statement that “management gives me the top and bottom line and tells me to come up with a middle that adds up” usually proved to be the truth.

During my thirty-eight-year consulting career, I’ve found nothing to change the low opinion of plans, budgets, and forecasts that I formed four decades ago.  Most of the clients I’ve worked with and other firms whose practices I’ve learned about treated them the same way.   It’s all part of “The Scheherazade Syndrome,” the subject of a blog I posted in this Forum earlier (and one of my podcasts).  And the larger the organization, the truer it becomes.  The executive’s main goal is not to make effective decisions, but to live to fight another day.  Their plans, budgets, and forecasts turn those executives into “game players” and discourage them from becoming “stewards” (the topic of another earlier blog/podcast). 

A major enabler of this abuse of these potentially powerful management tools is the use of predictive cost models that are not causality-based.  Causality-based predictive cost models reflect the true economics that underlie an organization’s operation.  When these models are not causality based, they can be easily manipulated (I know, I became a master of doing it) and be crafted to arrive at specious results – results that are superficially plausible, but actually unreachable. 

Most would agree that when it comes to costing, causality ensures that product and service cost reflect the actual operations of the organization.  When it comes to forecasts, budgets, and plans: 1) Causality ensures that the most critical the factors that lead to an outcome are taken into account (and those that do not lead to the outcome are excluded from your decision making), 2) Causality provides a roadmap for spotting factors than can be modified to improve performance, and 3) Without causality behind a projection, a company won’t have the information required to determine the reasons when actual results vary from those projections and then act upon those reasons to improve the results.  In short, causality results in plans, budgets, and forecasts that are the powerful management tools we were once taught about.

Fortunately, the Profitability Analytics Framework is based on a foundation of predictive, causality-based models.  Their use will enable management accountants to turn their organization’s plans, budgets, and forecasts from rituals and political documents into powerful tools that enhance their organization’s value.