Making meaningful forecasts is a struggle

"Not to beat around the bush, but the budgeting process at most companies has to be the most ineffective practice in management."

Jack Welch, the former boss of GE, in his book "Winning."

Many firms that put their 2009 budgets together at the end of last year will no doubt agree with him. Most of them will have already been consigned to the shredder, as the economic crisis has blown away the assumptions on which they were based.

Faced with exceptionally volatile business conditions, senior executives are finding it harder than ever to gauge how their companies are likely to fare in the months ahead. According to a recent global survey of 1,300 chief financial officers (CFOs) by Tilburg University in the Netherlands, America's Duke University and CFO Europe magazine, a sister title of the Economist, finance chiefs say that the struggle to produce accurate forecasts now tops the list of things that keep them awake at night.

Standard formulas of little use

With even short-term horizons as obscure as the San Francisco skyline during a summer fog, companies are finding their standard budgeting and forecasting of little use. The usual trick of plugging figures from operating units into spreadsheets appeals to number-crunchers, but can often generate misleading targets, especially when conditions change fast.

"The annual budget is even less of a meaningful document this year than usual," argues Cynthia Jamison of Tatum, a consulting firm that also provides clients with interim CFOs.

Lego has also been using a monthly meeting of senior managers, known as the operations board, to pool knowledge of what is happening in its various markets. At each get-together, the firm's executives not only discuss what has been going on that month, but also make their best guess about what is likely to happen in the 12 months to come.

Rolling forecasts

Some companies have formalized this kind of approach by creating "rolling forecasts." At the end of, say, the first quarter of a financial year, managers forecast the remaining three quarters again and then add an extra quarter's projections, worrying about only the most important financial variables. Many companies in Europe already use such systems, says Emery Sinclair of Revelwood, a software-services provider, and U.S. firms are suddenly taking a lot more interest in them. One benefit of rolling forecasts is that they discourage executives from becoming too fixated on the present at the expense of the future.

Yet with economies in free fall, managers also need up-to-date information about what is happening to their businesses, so that they can change course rapidly if necessary.

Tracking emerging trends

If everybody in a company can rapidly grasp what they have to do and how it is changing, they are more likely to get the job done. But some firms are reluctant to share their goals with the wider world. Unilever, a big Anglo-Dutch consumer-goods group, has decided against issuing a 2009 financial forecast to investors, arguing that it is difficult to predict what is going to happen, given the parlous state of the world economy.

"We're not just going to provide numbers for the sake of it," explains James Allison, the company's head of investor relations. Other companies that have decided not to provide annual earnings estimates for 2009 include Costco and Union Pacific.