The ability to create and adjust your forecasts quickly to allow management to make better and more informed decisions has a more direct impact on your share price than you think.
Luke:
Hello, everyone and welcome to episode two of the Ramesys Global podcast. My name is Luke Wundke, and I'm back with Ramesys Global Managing Director John Goodman. Welcome back, John.
John:
Good to be back. Thanks, Luke.
Luke:
John, today we're going to cover the true cost of your business operating without a financial forecast. John, it seems that the humble forecast is a controversial financial tool. Some mining companies see it as critical, others more of a tick box. I'd like to get your thoughts on this, but before we start, here are a couple of stats to note that makes for interesting reading. KPMG recently commissioned the economic intelligence unit to examine how leading organisations enhance the reliability and confidence of forecasts and, as a result, create measurable business value. Over the last three years, only 1% of firms have hit forecast exactly, and just 22% have come within 5% either way. On average, forecasts have been out by 13%.
Furthermore, executives in the survey estimate that such errors have directly knocked off 6% of their share price over that same period, a significant part of which has resulted from investor reaction. The research goes on to say that poor forecasting has a deeper effect through its impact on the strategic and operational choices of the business. Although other factors are undoubtedly at play, firms with forecast that come in within 5% of actual saw share prices increase by 46% over the last three years compared with 34% of others. Clearly, from this, good forecasting pays. So, tell me John, have you or Ramesys Global seen similar impacts with clients that have put robust reporting tools in place?
John:
Luke, those stats are screaming at us. Yeah, forecast well and be rewarded by the shareholders. Forecast badly, and the shareholders will punish you. For me, this is the nub of great financial control. So much effort goes into constructing the operational budget, but by the time it's signed off, operating conditions have changed, and it's out of date. Twelve months later, the budget doesn't look anything like the current business activity. So good forecasting is the continual process of refocusing on the current month's activities using the learnings and changes that have occurred in the last month. You're regularly cleaning the windscreen to see the twists and turns in the road ahead.
Luke:
Yeah, but surely, the budget is what's been presented to shareholders via the ASX. Shouldn't this be what the company needs as its target?
John:
Shareholders, mostly Luke, are not naive. They understand that the business is an ever-changing process. What they want to know, what's important to them, is that the management team are on top of the changes and good forecasting allows management to be ahead of what's coming up and look at ways to achieve the targets. So, if October milling costs exceed the target, management can start to analyse reasons, putting corrective actions in place ahead of the next ASX quarterly statement. Not only that, but management can also challenge the milling team to be looking for other cost-improvement opportunities that will offset the identified shortfalls.
Luke:
Yeah. Okay. That makes sense to me. So why don't people do that?
John:
Yeah. Good question, Luke. In my experience, there are a couple of main issues here. Firstly, fear that it's going to take up too much time. The operational team is always pressed with important operational matters, and financial matters are seen as a distraction from their core business. Secondly, it's the effort versus return. The effort and cost of putting in robust forecasting systems just aren't perceived as delivering a sufficient return. But look, this is where smart technology plays a key role. Reporting systems need to deliver an easy-to-understand summary of the actual performance against your last month's target and must give you the ability to drill down and analyse issues quickly. It's not just about putting a robust forecast system in place; it's about using it well. So, the systems got to allow users to quickly and easily update actions that will be occurring in the current month, and the consequent cost impact of those actions. Now with smart technology, all of this shouldn't take the operations people away from their core business activities for more than a couple of hours a month. If you can do that, they'll use it.
Luke:
Yeah. It's clear then, John, the impact of solid forecasting and scenario planning on a business. And it's tough to argue with those numbers, but I guess the big question for many of our listeners would be, yeah, that's all good and well, but at what cost? What's the cost of bringing such sophisticated budgeting and forecasting technology? How much pain are me and my staff having to go through? It sounds like a major upheaval with new systems taking years to implement and staff to train up. What's your response to that, John?
John:
Yeah. Look, good point, Luke. Replacing the current Excel process with smarter technology doesn't need to be difficult or incredibly time-consuming. Most of the clients we work with will have their current budget set up at a physical driven level within our software within six to eight weeks. So that means timely and meaningful reporting and various variance analysis is available to them within a couple of months. But the process surrounding forecasting gets you the big wins, and management needs to take the lead at this point. Because the operational team understands the business processes, they must be engaged in the forecasting process and not just left to the finance team. The role of the business analysts should be to help the operations team to understand their costs and to help them to identify the cause of their variances. Once they're armed with that knowledge, the operational units are ideally placed to make a real difference in business outcomes. They can change how the operational processes are working; obviously, the flow on is cost improvement.
Luke:
Yeah, it makes complete sense. Thanks very much, John, once again for your time.
Ramesys Global's goal is to make it easier for mining companies to achieve a transparent understanding of their cost performance, develop a cost-conscious culture, and create a single source of truth that helps senior leadership make better decisions faster.
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