Forecasting and fitness to lead

In such a period of macroeconomic uncertainty, the fact is this: weak leadership, particularly in the lower middle market, can kill businesses. Pressure is mounting, and as such, there has never been a more critical time for investors and investor-owners to test their CEOs, to dissect their abilities, and truly understand whether they are fit to lead.

 

To do so, while there are certainly a series of other criteria by which to judge a CEO, I would argue that none are more important than testing an executive’s ability to forecast.

 

For further reasons I will get into, this is all due to a core truth: the forecast is not just the clearest measure of a CEO’s commercial acumen and financial judgement, but provides a complete assessment of an executive’s character. Unlike isolated skills such as financial analysis and sales ability, the forecast encompasses all these key must-haves in a single process.

 

Moreover, it is not a process that can be automated by AI, either. Bar the financial projections, which – to an extent – can be undertaken by AI, the forecast’s tests of a CEO’s judgement and technical capabilities, self-awareness, and broader leadership sensibilities are all innately ‘human’. The process allows an investor to gauge everything they need to know about their leading executive, without the concern that the results have been masked by modern technology.

 

With that said, my advice is as follows: for all investors and investor-owners in the lower mid-market, I suggest you judge your CEOs using what I call the 5% test. That is, if your CEO misses their forecasts by 5% when disclosing financial performance, then they do not have the foresight, precision, and skill set necessary to helm the business through challenging periods.

 

Of course, much ink has already been spilt on today’s business environment. Tariffs, just one of the many worries, are estimated to have cost our businesses over £25 billion. More recently, instability in the Middle East – despite suggestions of an end to the conflict – is set to usher in a period of prolonged inflation, threatening growth projections, client retention, and beyond.

 

Such pressures have only increased the importance of prudent forecasting skills and judgement. And for all those reading who perhaps don’t know what bad forecasting looks like – or what to look for in your CEO – here are the two most common, and yet dangerous, habits to monitor.

 

First, I will address the more common issue of an overly optimistic forecast – something I have seen many times in the various CEOs I have worked with. Indeed, the danger of tolerating such inflated metrics is fairly clear: it not only masks any underlying issues or concerns in the business, but could lead to a period of over-hiring, over-investment, and over-leverage. For a business in a less comfortable financial position, at its worst, it could lead to collapse.

 

From experience, however, there may also be a greater risk for investors here. 

 

When your CEO’s forecasts lean more optimistic, it’s very easy to get drawn into their enthusiasm, bullishness, and belief – and assume the inflated metrics come part of a broader strategy, all before it’s too late. This is all a result of giving your CEO the benefit of the doubt throughout the budgeting process, and, as such, it is critical that investors remain hands-on with their executives – particularly at the early stages of the relationship, when you have a less complete understanding of their personalities. 

 

Indeed, the same solution applies when the CEO’s forecasts are more pessimistic – that is, when their forecasts are significantly more negative than an investor’s financial expectations. While this is less common, it can be indicative of a few qualities: the first, that your CEO does not understand the business and the forces that affect it to an acceptable level; the second, that your CEO is not completely honest and is seeking the optics of outperformance, come financial disclosure; and the third, perhaps most importantly, that the CEO suffers from a lack of ambition.

 

While this can also be solved by taking a more hands-on approach to your management, it is also a quality an investor can pick up very early in the working relationship. Naturally, when making the forecast, there always tends to be an element of the business’s revenue that can be considered ‘safe’ or reliably accounted for – before factoring in sales targets. If your CEO’s forecasts sit below that ‘safe’ number, you may want to question whether they share your vision for scale.

 

In truth, it is rare for an investor to complain about overperformance by their CEO – but it is certainly a pattern of behaviour to be mindful of nonetheless.

 

For all the reasons above, this is exactly why 5% is the right metric to judge your CEO’s forecasts by, and by extension, their fitness for leadership. Conditions are as tight as they have been in recent history – and when businesses are prioritising survival above all else, being generous with your KPIs carries risks.

 

In short, for investors in the lower mid-market, there has never been a more important time to have a complete understanding of the executive leading your business. And while, at first blush, 5% might sound harsh, tolerating a 10%, 20%, nay even, 30% margin is simply too wide to give you the confidence that your business has the right leadership.

 

From revenue and profit projections to the assessment of delivery standards, client sentiment, and cultural stability, the forecast is not just a financial exercise; it is a core, all-encompassing leadership metric, a measure of your CEO’s true quality.

 

And in today’s uncertainty, it is certainly a skill worth testing.

 

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Rami Cassis is an international turnaround investor and interim CEO. He is the principal of Parabellum Investments, his family office that invests in mid-market firms worldwide. 

 

Main image courtesy of iStockPhoto.com and simon2579