Forecasting is all around us. From the weather to next year’s kindergarten enrolment to the U.S. presidential election. No matter how accurate past forecasts are, many seek out new information to make decisions. Anticipating what the future might hold helps with preparedness and planning.
Philip Tetlock and Dan Gardner researched and co-authored the book Superforecasting: The Art and Science of Prediction. Their research determined there were attributes and skills which forecasters can learn to improve their predictions. Most farm managers are familiar with using weather forecasts to plan their day-to-day operations. Less are familiar with using financial forecasts to guide their longer-term business plans.
Financial forecasts (sometimes called projections), like the weather, have reduced accuracy the further they extend. Post-harvest however, farms have good information to start updating accurate financial forecasts for the upcoming year.
What’s the point when everything is constantly changing?
Faced with so much uncertainty, farmers need to control what they can. Budgeting and forecasting cash flow are two basic risk management best practices within farm managers’ control. Many rural municipalities have formalized budgeting processes. Some farms’ balance sheets are as big as their rural municipalities. A lot of financial risk is taken on every year. Farm managers should be employing similar best practices.
Attributes of superforecasters
Some attributes of superforecasters outlined by Tetlock and Gardner I think are applicable to farmers include the following.
Farm managers need to consider what research is worth their time. For example, is following the price of oil, or preparing next year’s chemical budget a better use of time? The price of oil is highly volatile and your forecasting success rate will likely be low. However, knowing your crop rotation and chemical retail prices can help you put together an accurate chemical budget for the upcoming crop year.
People, myself included, tend to seek out information that confirms their biases. For example, one U.S. presidential candidate is better for the U.S. economy than the other. Farm managers should seek out information in areas such as agronomy, marketing and finances that contrasts their current beliefs. For example, medical professionals run drug trials — farmers can perform field trials to test results.
Perpetual beta is a computer programming term that refers to the constant or indefinite updating of software. Another attribute of superforecasters is their commitment to continually update their forecasts with new information. Rolling cash flow projections is an example for farm managers. One time, or static, income/expense budgets are only current as of the day they were prepared. Information is constantly changing, and farmers should consider this in their budgeting strategy.
Therefore, in many cases, best management practices like budgeting and cash flow projecting hasn’t kept pace with farm expansion. Consider using some attributes of superforecasters for your longer-term business planning.
Craig Macfie, CPA, CA, PAg, CAFA, is a consultant and manager at Stark & Marsh CPA LLP in Swift Current, Sask. He can be reached at 306-773-7285 or [email protected].