No, the cat did not just walk across my keyboard. And the editors weren't asleep when they reviewed this copy. The jumble you see in the headline is made up of the first letters of the words in one of the most important concepts you will need to know as you start working on your plan for 2020:
What did they know, and when did they know it?
Step 1
The first step in preparing a new forecast is a careful review of the previous forecast. Knowing what we got right and what we got wrong is not enough. Knowing the “why” of what we got right and what we got wrong is also not enough. It is not until we know what we got right, why we got it right, and when we got it right that we know enough to make a complete assessment of the accuracy of our forecast.
We made our first projection of aftermarket activity for 2020 at the end of the third quarter this year, based on the information available at that time. Our second projection of aftermarket activity for 2020 will be based on the information for the full calendar year of 2019 – we will have this information in late-January 2020. When assessing these projections next year, we will compare the actual results of both projections to see whether the projection we made based on the full-year data was more accurate than that based on the partial-year figures.
Why does this matter? Because if it turns out that the projection based on the full-year figures is significantly more accurate than the one based on the nine-month figures, you have just learned that you should not be using the nine-month figures to make your projections.
Step 2
The second step in preparing a new forecast is deciding which variables to include and how much weight to give them. Pro tip: less is more.
When we take on an engagement where a client wants us to make projections, we start the conversation with this question: “What piece of information about the future would give you the most confidence in making the decision for which you need the forecast?” We ask this for two reasons. The first is to better understand the client’s situation. The second is to exclude all irrelevant information.
Don't forecast what you don't have to. For example, there is no point in including a global economic outlook if the client tells us that knowing whether their best customer will be in business a year from now matters most.
Step 3
You will now be ready to proceed to the third and final step in the planning process: letting your audience know the margin for error. This is not a cop-out. It is also not an excuse. It is the basis for realistic expectations. If you have narrowed the forecast elements to those that matter most, and you have identified the reasons why and when reliable information will become available, it is perfectly acceptable for you to advise the audience of how wrong you can be and still be right.
Preparing plans is never easy. With uncertainty on the rise, you will be tempted to add variables to your analysis. Before you do that, keep in mind an adage from the folks who build bridges and roads. “When in doubt, make it stout, out of things you know about.”
Knowing how, why, and when you were right in the past is the best foundation for repeating that process in the future.
With a long career managing portfolios and coordinating domestic economic forecasting programs, Robert Dieli began RDLB, Inc. in 2001. In this role, Dieli serves as an advisor to many firms in the trucking, consulting, and financial services sectors. He is also an economist with MacKay & Company.
