×

What frogs in jars can teach you about business forecasting

by
Ray Wyand
August 3, 2021
3 min. read
giniPredict | Business Forecasting
"There's only one thing you know about your forecasts," says Steve Morlidge, former controller with Unilever Foods and currently director of consulting firm Satori Partners. "They will be wrong."

How apathetic frogs gave us the modern forecasting technique

Just as the frog was never designed to predict the weather, a spreadsheet was not designed to observe the changes in the world in real time.
Just as the frog was never designed to predict the weather, a spreadsheet was not designed to observe the changes in the world in real time.

Although the act of making predictions is as old as time, the forecast is a relatively modern creation. The forecast was originally developed for the maritime industry, created by Admiral Robert Fitzroy in 1860, who was best known for being Charles Darwin’s captain on HMS Beagle. His weather forecasts were designed to reduce sailing times with better wind charts, and served to replace the existing method of predicting weather - which was to monitor the excitement of a frog in a jar.

The frog in the jar, while cheap, was not particularly effective. Between 1855 and 1860, >7,000 ships were wrecked off the British coast due to the frogs failing to jump around enthusiastically enough before a storm. Fitzroys innovation was to use the telegram system to track storms as they developed, and warn a port before they arrived. Like so many innovators, he was mocked, ignored, and eventually admired. 

Since then, the forecast has evolved, not only focusing on weather, but all aspects of our life. Financial forecasting has, in itself, become both an art and a science. Many large businesses, such as Amazon, have made their ability to forecast a competitive advantage - wielding AI and massive amounts of data to plan sales, inventory and headcount in almost real time. But on the other end of the spectrum, many businesses are still reliant on the modern day frog in the jar - a spreadsheet full of assumptions and gut feel. 

The spreadsheet in itself is not a bad tool, and its flexibility has given it the ability to solve problems for almost 1 billion people. But just as the frog was never designed to predict the weather, a spreadsheet was not designed to observe the changes in the world in real time. For many, the act of forecasting becomes an act of pageantry performed on an irregular basis. The goal may be to secure investment or make a budget, but ultimately, these forecasts are accurate “0.00% of the time one year after issuance” according to Phil Nadel, co-founder of Forefront ventures. 

Why even bother forecasting

80% of the small businesses that ran out of cash had no warning it was going to happen - with business owners saying that the knockout blow for their company came as a complete surprise to them.
80% of the small businesses that ran out of cash had no warning it was going to happen - with business owners saying that the knockout blow for their company came as a complete surprise to them.

Well, for businesses, the first thing is that while you can make many bad decisions in your business - you can only run out of cash once. It cannot be overemphasized how important cash management is for any company, big or small. You can miss sales projections, you can underperform on quarterly earnings - but you must never, ever, run out of cash. And yet 80% of the small businesses that ran out of cash had no warning it was going to happen - with business owners saying that the knockout blow for their company came as a complete surprise to them. In many cases, they did make forecasts, and of course - these projections were wrong. But that is not what killed them.

How should businesses forecast their financials?

Should I take an umbrella out in 3 months time?

When Phil Nadel says that “0.00% of financial forecasts are accurate 1 year after issuance”, it would be easy to overlook the crucial part of this quote, which is that the time frame is 1 year. And the reality is, it is simply impossible to predict what the world looks like in a year - but that doesn’t matter, because you don’t need to predict what next year happens. Instead, the challenge is to continually update your predictions over the year. 

Rather than try to estimate every single day you may need an umbrella for the next year, it is more accurate to look on a day to day basis. And this learning from our personal life is something businesses can learn from.

Run forecasts in a few clicks, try gini for free

The secret to forecasting is not to spend weeks accurately predicting a distant future, it is to refine and automate the process to such an extent that your forecasts can update in real time. For some, this is to move from a quarterly planning and forecasting cycle to a weekly cycle, but for Amazon they have refined the process to such a great extent that the forecasts are updated on an almost real time basis. 

This may seem like overkill for a small business, but ask yourself this. If 80% of businesses fail to forecast that they are going to run out of cash - how different is this to the sailor whose frog didn’t warn him of a storm?


Ray Wyand, CEO of gini
Why I write content :

It’s time for me to shamelessly ask for your support. Our company is dedicated to the idea that finance should be simple, easy and fair for everyone.

To deliver that, we’ve built a platform that helps small businesses to save time, optimize cash flow, and access growth capital. We’ve priced it at $19.99 a month to make it accessible for everyone - but I’d appreciate your help getting the word out in your company.

  • For founders we can give  real time insight into the financial health of your company and help them to access growth capital
  • For in house finance teams, we can get you promoted by helping you to automate your most manual processes and helping you  create reports your managers will love
  • For investors, we can help you underwrite better, faster & fairer whilst also helping your portfolio automate their reporting in real time
  • For accountants & book-keepers, we can increase your margins through automation and value added services that help your clients to grow

If you know any of these people - please email me at ray@gini.co

If you are one of these people -

Try gini for free
Download full report here

Contact us
Connecting to Xero

Subscribe

Get feature updates, plus insights from other business owners delivered to your inbox.
Request access

By clicking submit, you consent to allow gini to store and process the personal information submitted above to provide you the content requested.

Latest posts