Here’s a one-in-a-million scenario that happened last week to a friend and that I would surely not believe had anyone else told me about it.
My friend had prepaid for a professional service. The professional was working for a small business where he was also the owner. Because of their good relations, he undertook the project personally. Unfortunately, he passed away early last week, completely unexpectedly, from a heart attack. My friend is now in search of another professional (which she will have to also pay – it doesn’t make sense to ask back the prepayment from a grieving family) and lose quite a lot more time, both while searching and while the new professional services provider comes up to speed and continues with the project.
Unfortunate as this real-life example may be, it also reminded me one of the basic principles of forecasting that I teach in my classes:
90% of people who come to me for help, only have one forecasting scenario, which is sort of the average expected performance of their business. (Depending on the situation, some may opt to even present unrealistically good scenarios, hoping that I will not challenge them – e.g. in the context of a sell-side valuation.)
The issue that I have with this approach, is that the average scenario, almost never materializes. If my profit / loss projections can be either +10, or -5, depending on which set of assumptions materializes, the answer isn’t to budget for a profit of +5. The management need to keep in mind that they may end in the -5 side of the scale and appropriate contingency plans should be in place in advance.
Because life is what it is. It’s not average, even if the math make sense.