Blaming Non-Recurring Events for Missing a Forecast
I just got out of a board meeting for a company I’m an investor in. It included a third quarter update from our CFO and President. In great detail they walked us through the year-to-date financials, including where we were “over budget” and where we were “under budget”. Although overall results were positive given the market environment, we are clearly missing our targeted numbers which we set just 12 months ago. The reason for missing our numbers? One-time events. We even saw a recast profit and loss statement showing how much money we’d all be making if it wasn’t for these “one-time events.”
One-Time Events: The Good, The Bad, The Really Crazy!
One-time events, also called “non-recurring events” or “one-time charges”, are things that happened to a business, but were unforeseen by management in the prior year and are unlikely to occur again. Public and private companies alike often dismiss one-time events with a wave of the hand. “We would have hit our goal except for these unforeseen circumstances.” Or, “we are performing great excluding one-time charges.” While it’s definitely important to understand the “normal operations” of a business, as an investor I’ve always thought these one-time event excuses were bullshit. Here are just some of the one-time events I’ve heard over the years as a reason why someone missed their forecast:
- Legal fees related to a lawsuit
- Due diligence expenses related to a merger
- Expenses related to opening new bank branches
- Expenses for severance and search fees after firing a senior executive
- Write-off a large loan due to fraud
- Marketing expenses related to new product launch
- The economy (the market) is worse
- Disruption when team leader announced he would be undergoing transgender surgery (I’m not making this one up)
Unforseen Event = Bad Planning
In most cases, one-time events mean you aren’t forecasting or modeling your business properly. How can there be one-time events related to product launches, mergers or opening bank branches—weren’t they part of the strategic plan? While a lawsuit might be unforeseen, can’t we have a healthy budget for legal fees knowing that litigation is unfortunately part of doing business? And while you can’t expect that a top executive will need to be fired or another may choose a transgender operation, you can forecast lower revenue growth numbers knowing that unforeseen bad things do happen to sales.
There are ALWAYS unforeseen events in business!
My belief is that there are always unforeseen events in business. Last quarter there was lawsuit, this quarter our top sales person got hit by a bus, next quarter we’ll have an acquisition opportunity to deal with, and on and on. While we can’t know what the one-time event will be—I don’t expect business leaders to have a crystal ball—we can and should plan for uncertainty and dynamism in our forecasting process.
You can increase the loan loss provision, increase the marketing budget, increase legal budget, assume one sales rep or division is going to have an off year. Launching three products–assume one will tank. You can always release the “found” money at the end of each quarter if in fact it isn’t chewed up. Is this sandbagging your numbers? Maybe, maybe not. But I’d rather be pleasantly surprised with an upside swing in net income than miss the budget and hear about all the bad things unforeseen by management.
And in our personal lives…
And on a personal note, we should be vigilant about this mindset in our personal lives too. I am always shocked to open up my credit card statement each month. How could I have spent that much money? And then I scan the amount column looking for the outliers—the one-time events—and each month they’re there. Oh, I forgot about that new washer and dryer, or 3-day weekend in NY, or fixing the roof, or donation to the politician, or the new deck.
For awhile it was easy for me to fool myself and think, “Oh that was unusual, my normal spending is much lower…nothing to worry about.” But eventually it dawned on, me although the actual big expense item will change, each month I’ll find one or two items to spend money on that will keep my credit card bill at the same level. Once I acknowledge the reality of one-time events, I can plan accordingly.
Do you know anyone who uses one-time expenses as an excuse for missing their numbers?
Kevin Kruse is a NY Times bestselling author and keynote speaker. Get more success and tips from his newsletter at kevinkruse.com and check out keynote video clips. His new book, Employee Engagement 2.0, teaches managers how to turn apathetic groups into emotionally committed teams.