A tale of sharks: importance of budgeting and forecasting

Let us assume for the sake of simplification that investments(projects) are like vacations; measured in how much time (money) we have available. One has the option of stay at home, spending the hard earned, precious and scarce days-off in comfort and safety; like bank term-deposits. Or one can be more adventurous, and take on slightly riskier trips, going around your home city, again let us compare that with bank bonds, slightly riskier but it would require a chain of very unfortunate events, for our time-off(money) to be lost completely and; if are familiar with the city you will know how to get from place to place, so your precious time-off will be well spent, efficiently and the returns  on your decision will be positive.


(if you are a business professional and my blog is making you cry of boredom, now is the time to leave, have a look at this book http://lib.hpu.edu.vn/handle/123456789/22060 it is on advance statistics used for business and economic scenarios, a treat for anyone with interest in the topic. If you are an expert then you should have interest in that competency, take 24 hrs for the access to be granted so be patient, you should also have that competency! 🙂

Now let us talk about the other side of our equation; overseas vacations. For this type of vacation options are many, one can get an organised tour, comparable to an investment fund; not as satisfying as being an FIT (Tourism industry jargon for Free Independent Tourist), but relatively certain and definitely safer than the prospectus of travelling on your own, or with a group of equally inexperienced travellers. These FITs. behave the representative inexperienced investor, on a journey to an unknown destination. Rationality says that they all try to minimise risk and danger, on themselves (or their time/money).

Therefore, some FITs will approach travel agents and get things in order prior to their travels, receive sound and informed advice, from professionals with relevant credentials and references of success.

However, there will always be those willing to take on more risk (we all have those friends who go skydiving or diving with sharks). And this extra risk sometimes is out joy, but in the case of vacation (or investments) planning(budgeting), they most likely do it because of convenience trying to save time (the currency in this scenario) or, in the worst case they are lured by “shop keepers” with promises of health and fortune (you should visit the spice souk, those guys are totally honest, on promises and pricing!).

Now, let us imagine this scenario:

You have only one week available to you (budget), and you want to go to the northern side of Myanmar, you know nothing about it and neither anyone in your close circle; what do you do?

  1. You go to a reputable travel agent, get all the transport organised making sure you reach your destination within your means.
  2. You hop on a plane, not knowing the place or the language and hope for the best.
  3. You go to a guy you know who have been to Thailand, and is a neighbouring country so you take his advice.
  4. You go to a travel agent who is known for booking people trips with long stop overs because, he makes more money that way; trips so long that your time-off(budget) is spent well before you reach your destination, but you like the guy.

You would think the last two are ludicrous options right? Well, the historic regional scenario created a high demand for “Travel”, that a friend who dives with sharks every morning, may be safer than your money. How did this happen? Well is known to all that the budget sizes in the region are for the most part, comprised of investors who have enough wealth to sustain a trip around the world on foot in terms of the scenarios described above (Money = time-off). Thus, it has been feast season for the Kings of the ocean since 2010, now the market is changing. People are saving up and want to improve their lifestyle, invest in something they believe in or simply diversify their retirement funds. And it is infuriating to see how sense does not prevail (I don’t call it common sense, is not common. At all. Period.), to see how these honest and hardworking people flush their savings down the drain.

So let’s outline some basics of budgeting and forecasting to help you weed out a business plan with low probability of success:

  1. Forecasts are the result of statistical work, a serious business consultant will benchmark against multiple businesses and, He/she will look at market reports (KPMG, PWC) to validate the assumptions.
  2. Assumptions will be clearly outlined in the model, and supporting documentation will be included. Please question every number and how that number made it to the model, make sure they’re not pulled out of thin air, by taking notes and cross-referencing that information
  3. At least three scenarios should be presented to you, a break-even, a conservative and an optimistic scenario. The optimistic scenario will give you a dream and a target, the conservative will give you a budget to work with and the break-even will provide you with an exit point; your break-even is a FOK (Fill or Kill) order, achieve it or forget about it(and cut your losses).

But we don’t want to forget about our money, then start by not buying-in for projects or investments that promise millions from day one, or offer payback periods less or equal to 1, start from the sustainable base and a return slightly higher than a bank deposit.

Remember return is correlated to risk in the majority of investment decisions, so if exceptional riches are promised. Then is no different than gambling in a casino; my recommendation at that point: go to the casino at least they will give you free drinks after you burn a few thousands.

  1. Always ensure that your budget includes working capital for at least 3 months, even space rockets need support to take-off.
  2. Lastly, make sure the budget and forecasts comes with processes to monitor the performance of the investment or project against the forecast, and that the forecast is updated quarterly if the actuals differ (+-20%) from the plan presented. Furthermore, if the forecast needs adjustments because is going in collision course to the FoK line, corrective measures should be taken.

I use a cloud service called Xero (www.xero.com ) it allows for my finance teams to provide me with the data in real-time, and I can compare it directly against budgets anywhere I am.

I am working on a series of templates for people to work out their own business budgets(I’ll post them in a week or so), depending on the type of business; this will provide something to reference the forecasts given by your advisors. Please do not try use them to invest your life saving, seek some advice. Even with the best online templates in the world, you still need the ability to identify areas of risk and opportunity.

After all you wouldn’t go to northern Myanmar on your own and without a map, just because with one blogger told you it was fine to do so, would you?



19-03-2017 – CAB

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