having been a professional manager with hands on experience of the planning process and facing the music for actual delivery, I am convinced that it is a total waste of time. The best that one can do in business is forecast for the short term to plan for needed resources, innovate as you go along and keep delivering a constantly improving bottom line.
I have a lot of sympathy with Ramana's position. However, in responding, I also said in part:
I do have real problems, however, with one point you made, the idea of a constantly improving bottom line. I now question whether this is either a desirable or achievable business objective.
I don't have time this morning for a proper post, but I did want to flag this issue.
Without going into full details at this point, my concerns can be summarised this way:
- Profit itself is not a clear cut concept. Leaving aside definitional issues, do we define profit as profit at a point or sustainable profit over time?
- Profit as a share of GDP fluctuates, but over time tends to grow around the rate of growth in GDP.
- In a competitive marketplace, above normal profits earned by particular firms tend to be eroded through competition.
- If, as is presently often the case, the sum of present and future profit projections by individual firms exceeds the total profit share by a significant margin, then it follows that the majority of firm's projected profits are unachievable. Worse, in trying to achieve them, they are likely to substitute short term gains for longer term profits.
To illustrate this, consider price/earnings ratios.
These used to be expressed in terms of the ratio between price and profits in the preceding period. I could understand this. The only judgement that I needed to make lay in a decision about the sustainability of past profits.
Now P/E ratios are based on projected profits. Since I know that profits as a whole must fall short of projections, it follows that the majority of P/E's will be wrong. They provide no guide at all.
See what I mean?