Business Performance Evaluation: Approaches for Thoughtful Forecasting

Every day, fortunes are won and lost on the backs of business performance assessments and forecasts. Because of the uncertainty surrounding business performance, the manager should appreciate that forecasting is not the same as fortune-telling; unanticipated events have a way of making certain that specific forecasts are never exactly correct. This note examines principles in the art and science of thoughtful financial forecasting for the business manager. In particular, it reviews the importance of (1) understanding the financial relationships of a business enterprise, (2) grounding business forecasts in the reality of the industry and macroenvironment, (3) modeling a forecast that embeds the implications of business strategy, and (4) recognizing the potential for cognitive bias in the forecasting process. The note closes with a detailed example of financial forecasting based on the example of the Swiss food and nutrition company Nestlé.