When we go into any company's website, you get an idea of the revenue and cost projections that the CFO is making for the coming quarter / year.
Yesterday, I had a bit of a chat with somebody who thought that this was set in stone and they were moaning about the fact that some company missed the projections.
I started thinking about it and here's my initial thoughts. Frankly, you are always much more accurate in terms of your cost projections than revenue projections. You do have a fair idea about what's fixed cost and what's variable cost. What's BAU costs and what's discretionary / Change Cost cost.
But frankly, what your sales revenues would be is sticking a finger up in the air. Yes, I know you take your salesforce.com or your CRM system, and then use a probability framework to judge your pipeline and that gives you a sales projection. So if you say that next year, you have a 50% probability of making a 1 million sale, then you assume your revenue would be 500k. And that's your projection. This is much more complicated anyway.
But life is much tougher in the CFO world, where you need to judge a zillion factors before you give such a prediction. You need to think about how much margin you want to keep, what do your shareholders want, which phase of your lifecycle you are on, where are you listed, who are the analysts who cover you, what are the risks?
You need to make a judgement on the known-known's, known-unknows and unknown-unknowns. You need to think about the overall tax load and the individual country/divisional tax loads, you need to think about cash balances and retained earnings, think about share buyback's and preference shares, earnings depreciation and asset depreciation. Oh! loads of stuff.
And remember, at the beginning of this process, you are relying on the word of a salesman who is going to give you an impression of how much he is going to sell next year! It is more of an art than science. And the fact that firms and banks generally hit analyst expectations means that everybody is blundering around but thankfully in the same manner.
Final comment, you are slated in the marketplace if you come in under expectations, but you win if you are above expectations. But if you consistently come in under expectations, then you are incompetent as you dont know your sales guys. If you consistently come in over expectations, then you are incompetent and an optimistic git!!
Who said the life of an accountant or CFO is simple and boring?
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