Hello,

 

Good surprises are for birthdays, holidays and personal life. No one likes bad surprises - and the world of business doesn't like any.

But they will happen, nonetheless. And when they do, the key to surviving them is to adhere to a handful of fundamental principles, the topic of today's newsletter.

 

I appreciate your comments. Just click "reply" to send them to me.

 

Regards,

 

Charlie Goodrich 

Founder and Principal

Goodrich & Associates
 
 
May 2015 Vol. 4 No. 5
 
 
In this issue...
Minimize the Impact of Bad Surprises by Managing Expectations
Heard on the Street - Modern Man and his Corporations
About Us
 
 
 
Goodrich & Associates
[email protected]com
www.goodrich-associates.com
781.863.5019
 
Minimize the Impact of Bad Surprises by Managing Expectations

If there's one thing I've learned in 30+ years in business, it's this: There will always be surprises. You can count on it. And, many of those surprises will be in the form of bad news.

I have written in the past about risk, uncertainty and unknown unknowns, the source of many surprises. But, today's newsletter is about minimizing the impact of surprises by managing expectations.

Whose expectations? Just about anyone's. But the important class includes the CEO, Board of Directors, investors and owners, lenders and creditors and key customers and vendors.

The key to surviving surprises is to adhere to a handful of fundamental principles:
  • Understand the business, its key drivers and sources of risk and uncertainty. Any reliable forecast requires a model - make sure your model is valid and that you understand it thoroughly. Many surprises are from a lack of understanding of what drives particular outcomes, be those financial or anything else. If you don't see "it" coming, you can't communicate it and reset expectations. (See my newsletter on models for more help on this.)
  • Rip the band-aid off quickly. When the business is headed south in a big way, resist the temptation to break the bad news slowly, over an extended period of disappointment. Doing so only extends the time in which the focus is on the problem, rather than on the development and implementation of solutions. Plus, by continually leaking bad news over time, you paint yourself as someone who doesn't really understand what's going on.

    Another reason to rip off the band-aid quickly is to wake up your own team. Not everyone understands the situation is dire and quick action is needed. A delayed management response can be career fatal and costs the business money.
  • Lower expectations when trends head south. Figure out what you believe to be the worst case scenario... and then imply that things could be even worse. Why? First, because you are likely to be underestimating how bad things are. Your worst case may turn out to be the most likely. Second, if your expectations are correct, the business will decline as you are now saying, but less so. You can then attribute these improvements to your action plans put in place to remedy the situation. And we all know that often action plans take more time to bear fruit than your audience will grant. 

    When I was in the rent a car business, for example, I quickly learned the business was cyclical. By early spring one year, it was clear that the business was in a major downturn. At roughly the same time, a periodic "spring forecast" was due. So what to say in the forecast? I opted for telling the truth - actually, well worse than the truth. I took the revenue forecast to trend, delayed lowering costs and forecast large losses. Corporate was in a tizzy! We almost all lost our jobs. But by the end of the month, what we said would happen, did happen, everywhere. So we gained some credibility. While other parts of the company were crashing and burning compared to their rosy lemmings approach to expectation setting, we slightly beat our overly dire forecast. Modestly beating forecasts gave our programs time to work. Plus, as an added benefit, real worries about employment termination woke everyone up, goosing them to do what needed to be done as soon as possible.
  • Always present upsides and downsides or otherwise identify the risks in any prediction. When the most likely is no longer likely, explaining the change by referencing earlier upsides and downsides maintains credibility. When I come into troubled, liquidity-starved situations, I always preface my estimates with "I am new" and "this is the first forecast."

    I may tell a vendor, for example, that while I can't pay you today, call back next week and my understanding of the situation may have improved. When I do agree to a repayment plan, I always preface the commitment with the understanding that it is dependent on customer payments and so forth. If I can't make the payment, and I can tie non-payment to a risk I previously outlined, I can usually postpone creditor legal action for another week.
  • Don't be a sandbagger. While lowering expectations is important, if you cry wolf too often and to too great a degree, people won't believe your bad news. When it does materialize, they'll shoot the messenger with the explanation that he didn't know what he was doing.

    And, if you become known as a sandbagger, your audience may well set their expectations higher than you would like, because they don't know exactly how high to raise them over your habitual low balls.
  • Tweak results to minimize variances. This last recommendation may raise some objections, but good business people do it within limitations. Yes, there are small matters of timing that can affect the financial statements. But the bigger opportunities relate to pulling up spending in good months that will drive improvements in out months. Repairs and maintenance of plant equipment and advertising are two good examples.

    Many years ago, when I worked for Kraft Foods, I was responsible for the financial forecast for Kraft Miracle Whip and Mayonnaise. Margins were being squeezed due to commodity cost issues, so I over-lowered expectations. Kraft sold a lot of Miracle Whip and Mayonnaise back then, so much so that by forecasting product costs to four decimal places instead of the three used by the standard cost system, I could pad several million dollars. When year end was approaching, I sat down with the head of marketing and adjusted the forecast; he agreed to spend it all on TV advertising in December, leading to results for the following first quarter.
Remember, good surprises are for birthdays, holidays and personal life. No one likes bad surprises - and the world of business doesn't like any.

Heard on the Street

"Modern Man and his Corporations." This is what George J. Stigler, the University of Chicago Nobel Prize winning economist, had to say about this... in 1970.

Unfortunately, and in many important ways, conditions have not changed much since.

Read his short lecture here.

About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.


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