How do your estimates hold up in the real world?
February 2018 Vol. 7 No. 2

Periodic financial reviews are standard practice in businesses of all sizes. Reviews of one-time or event projections, however, are often done only by the larger companies.This oversight is a mistake. 

There is much to learn - and, as a result, improve - by paying attention to how project and event estimates fare once set in motion in the real world. Today's newsletter explains why.
All the best,

Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue...
Improve Your Review Process - Always Assess One-Time Projects Against Future Results

Most of us in the business world are used to financial reviews. Once a month, once a quarter, once a year... we assess how the business performed against forecast, plan, prior time periods, and so forth. We look for variances - favorable and not - and make course corrections to the business, change our outlook, and sometimes learn something new that we didn't know before. This is business 101 (or at least it should be).

What's less obvious - and less commonplace as a result - is the comparison of one-time or event projections against what actually happens.

What type of one-time projections? The projected return of a capital project such as a new piece of equipment, or even buying a company. The projected success of an advertising or marketing campaign. New product launches. Even the projected upside of benefit improvements on employee retention, etc.

Many years ago, when I was in the packaging business as a financial analyst, I reviewed capital project requests for the corrugated box division. These were requests for capital for new equipment or, more often, improvements to existing equipment. I reviewed the financial analysis for correctness and forwarded the requests up the line to the Division Controller, to the Division head of manufacturing, to the final review by the Division President. The Division President then decided what projects to include in the next year's plan.

Prior to reviewing the capital project requests, however, I always made sure to review the capital project reviews. These were an analysis of prior capital projects to see how they fared against the projections that were made at the time to get the project approved. Each plant reviewed prior capital projects the first year after they were complete, and even later, periodically, after completion. I made sure the analysis was correct, raised questions, and so forth. These projects then followed the same consolidation and review process.

From these reviews, we learned what worked well and what didn't. And, more important, why. For example, how close to projections was the actual project cost (and why)? Often, this is all that is reliably known after year one. But, we knew how to better budget the next similar project. Did the machine, for example, operate as efficiently as expected? From this we were able to meet the sales projections to utilize the machine, etc. As a result, we avoided making the same mistake twice and were able to focus on what was really working, too.

We did similar analyses when I worked for Kraft Foods. Here, we reviewed all new product launches, marketing changes, pricing changes, label changes... everything. The company had a formal "brand review" process at the division level. Each quarter, not only were financial results reviewed against prior projections, etc., but the success of prior marketing campaigns and decisions were assessed as well. Did last quarter's coupon drop generate purchases by new customers, or did it just give savings to existing customers? If we changed retail pricing for a product, was the impact on sales as expected or not? And so on. Since Kraft was a large company with lots of brands and products, these reviews meant that everyone had the benefit of seeing what worked and didn't across all brands and products. Dare I say synergy from scale?

So, what did these two companies get from reviewing projects of all kinds after the fact? Several things:
  • They made better subsequent decisions because the learnings from one project were analyzed and shared.
  • They allocated capital better, ultimately generating higher returns as a result.
  • They were better able to evaluate management performance. How much of the success or failure was due to the decision by a manager versus someone else's decision, market changes, etc.?
  • They stayed at least even with (and sometimes ahead of) their competition, particularly the smaller companies. If a given company's competitors do the same, there is no relative competitive benefit. But if a company learns faster than a competitor, it does have an advantage. This leverages the benefits of repetition that smaller companies can't achieve because they simply can't repeat as often.
Given these benefits, what are the best ways to do all this?
  • Institutionalize the reviews. Make it a process. In the corrugated box company example, the reviews of actual projects fed into the reviews of requested projects. All of which was tied to the annual budgeting cycle.
  • Ensure there is a process for transferring the learnings from the reviews throughout the entire organization. The knowledge is of limited value if it just sits in a report.
  • Tie in control systems and ensure there is some degree of independence between the after-completion reviewer and the project sponsor or advocate. If all the information for the analysis comes from the people who did the project, the opportunity to fudge or even just spin the review will be too tempting for some.
  • Evaluate capital projects every couple of years after inception. The same is true for acquisitions.
  • If there are lots of similar projects now or anticipated in the future, institutionalize the review process.
Time-based financial reviews are standard practice in businesses of all sizes. One-time or event projections, however, are often done only by the larger companies. This oversight is a mistake. There is much to learn - and, as a result, improve - by paying attention to how project and event estimates fare once set in motion in the real world.
Please share with your colleagues
Heard on the Street

There has been lots of noise about driverless cars. Less "noisy" but perhaps more serious are efforts by Google and others to develop driverless trucks.

Not so fast, suggests Dan Hanson in a response to a Tyler Cowen blog post, "I wonder how many of the people making predictions about the future of truck drivers have ever ridden with one to see what they do?"

Read more 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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