5 Lessons from Walgreen’s Financial Forecasting Blunder
The headline in The Wall Street Journal said: “Walgreen Shakeup Followed Bad Projection.” The buzz in the financial executive community was loud. The CFO at Walgreen Co., Wade Miquelon, had in April of this year told Wall Street that the nation’s largest drugstore chain would generate $8.5 billion in fiscal 2016 pharmacy-unit earnings, based partly on contracts to sell drugs under Medicare’s Part D plans. Three months later, the CFO revised his forecast down by $1.1 billion. What lessons can we gain from blunders in financial forecasting?
First off, the speculation in the trade press is that the CFO was paid to take the fall for a major snafu that other senior executives had a hand in. After all, the CFO walked away with more than $4 million. Putting all the gossip aside, the incident prompted the cognoscenti to comment on best practices in financial planning and forecasting.
Here are five ideas—just a short list—of the more poignant observations delivered by a host of regular APQC sources, commentators for the Association for Financial Professionals, and various social media groups for business and finance professionals:
1. The business assumptions underlying the financial forecasts must come from deep and nuanced collaboration with the operational leaders. If finance planning and analysis (FP&A) staff do not have their fingers on the pulse of what’s worrying P&L owners, then they are on their own in generating estimates. That’s the scary thought. For an APQC best-practice case study on this topic, see Building a Best-in-Class Finance Function: Intel Corp. Case Study.
2. The key to best-practice forecasting is transparency. Decision makers need the right amount of business detail (not a big dump of numeracy) to noodle out the FP&A team’s “what if” scenarios and figure out the best tactical path to revenue growth and profit protection.
3. Forecasts should be periodically reviewed and adjusted to ensure that business costs and opportunities are well-managed. This means the FP&A team must raise its periscope and examine external drivers of change; for example, changing patterns in customer demand, supply availability, labor cost, etc. An interesting APQC case study on planning for labor cost seasonality: FP&A Process Improvement: Labor Cost Planning at HD Supply.
4. Forecast business performance drivers, for example, the number of gadgets the company intends to sell given the patterns observed in customer behavior and evolving market realities. Do not simply extrapolate financial results based on assumptions that could be obsolete. For an energetic review of best practices, go to APQC’s recent webinar featuring Steve Player, the widely known thought leader for driver-based planning: Breaking Down Behavioral Barriers to Sound Planning and Performance Management.
5. On the issue of ultimate accountability, Samuel Dergel (author and CFO executive recruiter) notes: “the CFO is the leader of the finance team in any company, so if there is ever a boo-boo that happens within finance, it makes sense that the leader take the fall for it. But [sic] the distinction needs to be made between situations where the CFO is the leader and the accounting boo-boo happened under his or her watch, and where the CFO was active in leading, by commission or omission, the intention of not following the proper interpretation of accounting rules to make performance look better or to cover up reality with lots of make-up and concealer.”
To break it down: Walgreen's case was really about a giant error in financial forecasting. But, as Sam Dergel implies, if the “accounting house” is a mess, how on earth can the FP&A team have a hope of meeting the business’ need for well-informed, driver-based, financial analysis and forecasting?Tweet