As we enter the fourth quarter and approach the end of a year, greater attention will be focused on the business performance financials. We see this type of focus at the end of every quarter to a certain extent, but at the end of the year it peaks. Sales commissions and staff performance bonuses are paid based on annual numbers. Personnel ratings and reviews are conducted based on annual numbers. Business forecasts are to be completed in preparation for the next year during this time period as well. Predictability of business performance is now at a premium. It is also the time when businesses most try to avoid surprises. Surprises are those unexpected events that materially affect both the performance and the measurement of the performance of the business. Surprises can be viewed as both positively impacting and negatively impacting to the company. However when surprises are viewed against the three basic limitations that all businesses must deal with, Resources, Money and Time, we see that at the end of the year, time is in very short supply when it comes to dealing with surprises. That means that incremental money and / or resources will be expended on surprises, both good and bad ones. Good surprises usually come in the form of unexpected sales and revenue opportunities. A large un-forecasted order can come in. A product shipment scheduled for next year can be pulled forward into this year. Good surprises are normally associated with opportunities to increase the top line and via the financial flow through, increase the bottom line as well. However, even good surprises normally come with an additional cost. A large unexpected order will stress both the supply chain and production capabilities for delivery. Overtime and expedite costs may be required to meet the year end time frames. In short, because there is now limited time, it will take incremental resources and money to deal with even good surprises. No business leader wants to deal with problems, but if they are going to have problems, these are the types of problems that every business leader wants to deal with. Bad surprises on the other hand are normally associated with issues that unexpectedly reduce sales or revenue, or alternatively increase business costs or expenses, and again via financial flows reduce the bottom line business performance. Expected orders being cancelled or not materializing would be the primary example of a top line bad surprise. A reduction in sales will turn into a reduction in revenue, and all other things being equal, a reduction in predicted earnings. Top line bad surprises normally come about as a result of an overly optimistic sales team, or a sales team that is under engaged with the customer. Either way, it was not clearly known that the customer was not going to be buying, when everyone was predicting that they were. When the business is counting on the sale, the sales team needs to be fully engaged with the customer, as well as possibly a little conservative in their forecasting. It is far better to present the good surprise of an unexpected sale and the problems it presents than the bad surprise of the loss of a sale that was counted on to make the yearend forecast. Other types of bad surprises can affect both the top and bottom lines. Component shortages can cause unexpected production limitations precluding shipment and revenue recognition, changes to government regulations can add unexpected costs to products and unexpected legal or labor provisions can eat directly into margins to name just a few, are just a few examples of bad surprises. The point here is that these surprises are issues that can and should have been readily identified as potential risks to the business. If they are risks, then the need a risk mitigation strategy if they occur. If they are not identified, then the business team needs to understand why they were missed and take corrective actions, as well as examine the business for any other unidentified potential risks. If they were identified and mitigation was neglected, then the business team must address this management failure appropriately as well in order to avoid future similar situations. Again in either event, it is the business leaders’ responsibility to identify and either avoid or mitigate these types of bad surprises. Predictability of business performance is a key to the business’ success. As the end of the business year approaches it takes on a heightened importance. Good surprises can help bolster the numbers coming into the close of the year, but even good surprises usually come with the requirement of increased resources and financial costs since there is usually limited time to deal with them. Bad surprises on the other hand can cause problems with the business’ financial performance that there is not sufficient time for the business to recover from before the year ends. Bad surprises are normally the result of human error where either sales’ over optimism or management’s lack of attention to fundamental business practice has contributed to the business failure. In either instance the “surprise” needed to be identified well in advance of the event occurring so that the business could more accurately predict how it was going to perform.
