Corporate Finance as a Hurricane Center

Unlike too many business forecasts these days, there is one forecast most of us in the United States pay close attention to this time of year: the hurricane forecast.

This year’s forecast was released a couple of weeks ago, and the picture looks troubling, yet instructive.

By troubling, I mean that the forecast projects a highly active hurricane season:

For the current hurricane season (June 1-Nov. 30) in the Atlantic Basin, The National Oceanic and Atmospheric Administration projects a 70 percent probability of the following ranges:

• 14 to 23 Named Storms (top winds of 39 mph or higher), including:
• 8 to 14 Hurricanes (top winds of 74 mph or higher), of which:
• 3 to 7 could be Major Hurricanes (Category 3, 4, or 5; winds of at least 111 mph)

By instructive, I mean that financial analysts and managers and CFOs overseeing their company’s forecasting process ought to take note. Why? Because these finance professionals with forecasting and planning responsibilities essentially serve as their company’s hurricane center.

The long-range forecast is important, but it changes. The short-term forecast is even more important, particularly when it boasts an increasingly high probability of occurring.

For example, if a Category 4 hurricane is 98 percent likely to strike your city in the next 72 hours, your city immediately executes a plan to respond to this situation. The city is not going to avoid the hurricane. How well prepared the city is – that is, the extent to which it has developed, practiced, and tested a range of response plans to different scenarios – will determine how bad the damage from the hurricane is.

So it goes with business planning and forecasting. We can’t always get out of the way of economic hurricanes. However, if we plan for these hurricanes (i.e., create a plan in the event that revenue declines by 15 percent, 25 percent, 50 percent, or worse), we greatly lessen the damage that the economic hurricane inflicts on our company.