What Does it Take to be a Superforecaster?

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What business wouldn’t benefit from having a “superforecaster” to accurately inform management about relevant future trends and to guide superior decision making?

In their fascinating book, Superforecasting, The Art and Science of Prediction, authors Tetlock and Gardner highlight characteristics of the 2% who have proven themselves vastly more accurate than the rest of us at making accurate forecasts of future events. Superforecasters are:

  •     accustomed to taking the outside view on questions, to validate their forecasts
  •     comfortable making quantitative forecasts, using percentages of likelihood as opposed to saying “possibly,” “probably,” etc.
  •     adept at making small, ongoing calibrations to their forecast over time

As a consultant I would say that even if you don’t have the luxury of having your own superforecaster you can benefit from these practices.  Companies of all sizes should consider outside factors in making business decisions, and not rely on just one original forecast.   You’d be surprised how often businesses ignore new information which could and should be the basis for doing an updated forecast. The best organizations go back and revisit forecasts more than once, which allows them to stay ahead of the game.

I am also a big proponent for the importance of getting information flowing across the organization to make better business decisions, and Tetlock and Gardner’s research backs that  idea up as well.  They report that teams are 23% more accurate at forecasting than individuals.   They also note that the teams that were superior at forecasting had “no hierarchy, no direction, and no formal leadership.”  Which I take to mean, leaders need not head up the forecasting team and input should come from all levels of the organization.

So if you are a business owner who wants to base your business decisions on better forecasts of future events, task a team to do the forecasting.  And, have the team members read Tetlock and Gardner’s book, it is very insightful about the factors that lead to better forecasting, and better business results.

Misbehaving and the C-Suite

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In many companies, delivering a large gain will get you a modest reward, while taking actions which lead to a large loss will get you fired.  That is just one of the important lessons to be learned from Misbehaving, Richard Thaler’s book on Behavioral Economics, published in 2015.

Thaler provides valuable insights to C-Suite denizens who want to discourage their managers from taking unnecessarily “timid choices.” and encourage risk taking. He recommends that business leaders :

  • reward the manager when a higher risk action leads to success
  • do not overly penalize a manager if risk taking leads to a business failure, especially if the execution was good, and there were conditions beyond the control of the manager

In this way, business owners will be encouraging managers to perform in a way that is well aligned with business objectives.

During my time as a financial analyst at General Foods , I got to witness some pretty dramatic career rises and falls, with the product managers for the failed SunApple and Orange Twist brands both fired on the same day, while Crystal Light category manager Jim Kilts was on his way to eventually become CEO of Nabisco, then Gillette and more recently, the co-founder of Centerview Capital Holdings. Cyrstal Light was a strong new diet beverage concept, and beautifully executed by Kilts.   SunApple and Orange Twist were less unique new products, and the execution by their respective product managers was not good, who both lost their jobs.

As a consultant, I am mindful of creating alignment concerning risk taking between client/owners and their managers when trying to affect beneficial change.  For example, recently working with a pallet manufacturing client, their operations manager was reluctant to schedule pallet production, unless there was a firm order in hand, even though the client had decided on a “make-to-stock” strategy for certain pallet types, and this had been communicated to the manager.   The operations manage saw it as a risky move to build this opportunistic inventory, for fear that he would be criticized from any resulting overtime.  The solution was to develop a scorecard report for the owner and his manager to review at a set time each week, so they could hold hands on any “make-to-stock” production decisions, including those requiring overtime production. As a result, my client reports he has leveled out some of the peaks and valleys in production, and also is enjoying improved customer service and incremental sales to satisfied customers.

Cash Flow Planning is Tricky but Critical

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Earlier this month, I had the chance to be a guest speaker on the topic of cash flow planning for business owners, at a Kauffman FastTrac class.   It’s an area of financial management that many business owners find particularly difficult to get their arms around, including Brian LaGette and Ron Wilson, two Wharton graduates, and the founders of what Inc. Magazine described as “The Company that Grew Too Fast.”   

Their company got its genesis as a Wharton class project in 1994-95, and was eventually named 180’s. They experienced explosive revenue growth, increasing from $1 million revenue in 1999 to $15.4 million in 2001, but were not able to finance that growth in sales of ear warmers and other products, and were eventually acquired by Patriarch Partners, a private equity firm specializing in distressed debt.   One aspect of their downfall was that they failed to foresee and plan for the additional working capital demands, both inventory and accounts receivable, from expanding their sales from sporting good stores to department stores.

Business owners looking to build and use a cash flow model for their business would be well advised to remember the following:

  1. Give a lot of thought to your sales forecast, as this is a key element to accurately forecasting cash flow
  2. Understand your working capital ratios, how they change seasonally and with business growth, and what that means in upcoming quarters
  3. Try for a model that is detailed enough to be accurate, but not so complicated that you will avoid using it
  4. Back test the model on your past quarters’ results to validate it, before relying on it to project the future
  5. If no one on your team has the ability to do this kind of modeling, think about tapping an outside resource to help with the development, implementation and interpretation of cash flow model results

When done right, a cash flow model will help you forecast the need for additional cash in time to act, and it may even help you make decisions which lessen the need for additional cash to run your business.

Understand Your Profit Margin

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Profit margin is a key metric for understanding the financial health of your business.  To understand the importance of looking at profit margins, and the difference between gross and operating profit margin, please click through to this article by my colleague Geri Stengel: Profit is Nice. Margins are Even Better.

Financial Management Report Cards Available

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I spoke at an Urban Manufacturing meet-up group being held on. Nov. 19th at ITAC’s office at 39 Broadway in lower Manhattan.   The meet-up group will meet again in January, for more information go to http://www.meetup.com/Urban-Manufacturing/events/218594846/

November 19th attendees had the opportunity to rate how their business is doing in these four areas of financial management:

  • Budgeting
  • Management Accounting
  • External Fund Raising Capability (as applicable)
  • Cash Management/Controls

If you are interested in seeing the material we discussed, please email me at david@rudofskyassociates.com to request a PDF copy.