Life

Are long term and short term planning mutually exclusive?

In financial planning one often looks at recent events as the first basis to project the immediate future, as what better than yesterday as a way to predict today? When it comes to longer term planning, things start to get complicated, as the number of variables that can influence any given future increases. Hence would it be logical to conclude that the short term and the long term are mutually exclusive and should hence be looked at as two separate subjects? No, nothing can be further from the truth. The long term is as much an intricate part of the short term, as is the inverse.

 

How to construct a short term plan.

 

Each company, like each person, usually has an objective they are trying to attain. It may be purpose driven, like to supply clean drinking water to a certain region or country, or it may be financial, like to reach an increase in sales of +5%.

Like a person, with personal objectives, a career or just life goals, these objectives dictate the steps we take and the immediate decisions we make.

Without an objective, we just turn around in a circle or aimless plod forward into a misty future.

 

Having a destination in mind:

– gives focus

– helps align actions in some form of consistency

– avoids turning in circles and not dealing with obstacles

 

The objective is the essential starting point for any short term plan.

 

Once the objective is clear, theoretically it should be easy to construct the short term steps to get to the objective. Think about a map and going from where you are, to your point of destination. Once you know the destination, you can trace out the path to get there.

The same is true of short term planning, with the one difference being that the roads to get there are possibly not yet built or known.

 

Hence the reason we turn to the immediate past.

 

The immediate past gives us an indication of how successful past actions were to getting closer to the objective. It allows a clearer picture of the actions-reactions and enables an extrapolation into the future.

 

Sales to a certain retailer or distributor may have grown 5% in the past year and hence it could be appropriate to conclude that sales to that retailer or distributor will continue to grow at that pace into the future.

 

This is the trap in using the immediate past as an indication to the immediate future: Don’t stop at face value.

 

A certain level of granularity is needed in understanding the past to enable proper extrapolation into the future.

 

Was the sales growth due to a build out of distribution among new shops – gaining footprint or numerical distribution?

Or was sales growth due to new clients buying from the same amount of shops – gaining consumer demand?

The latter may be a better indication of future growth, especially if there are no more new shops to sell to.

 

The deeper the analysis of the past, the better indicator it becomes to establish a reasonable, immediate future.

 

If a personal career goal is to become financially self-sufficient in the next 12 months, an understanding of past net wealth growth and the underlying drivers of that growth (savings rate, investment returns, exceptional events) can be sufficient to project whether the goal is attainable or not.

However an additional element needs to be thrown into the analytical mix before deciding on a reasonable immediate future: The impact of current changes to the past events.

 

Current changes can have a defining impact on immediate futures

 

Current changes can take many forms. They may be the bankruptcy or imminent bankruptcy of a client or distributor. They may be the achievement of an educational degree, losing a job or obtaining a driver’s licence. It may be the introduction of a new product line or upgrading of a past one.

 

These current changes can significantly change the extrapolated past and make the immediate future remarkably different from what was initially expected.

 

Any short term forecast needs to take stock of these current changes and decide on whatever would be the most reasonable or likely impact of these changes.

A bankruptcy of a major client would probably mean sales may be negatively impacted to that client. Obtaining a driver’s license may open the possibility to take on a role further away.

 

Each current change needs to be applied to past indicators and extrapolated outwards into the short term future on what could be considered the most obvious or likely outcome.

There is never one single source of truth when developing these short term plans and often something believed to be the most reasonable proves to be the farthest from actual reality, but it is the only starting point we have.

 

With such a dynamic present can we ever plan for the long term?

 

Once the obstacle of merging current changes with past events overcome, the immediate (reasonably likely) future opens up. The next challenge is developing the longer term plan.

In longer term planning the focus becomes identifying likely future changes that would impact the immediate future and thinking through the reasonable impact of those future changes on the immediate future.

The goal when planning for the longer term is identifying the major and likely future changes that could occur. This is the “art” part of long term planning and is definitely not a science.

Future events are similar to current changes. They may take the form of new products, new market entries, new competitors or a wedding, a future move to a foreign country or retirement.

Each of these future events needs to be reasonably likely to occur to allow them to be factored into the analysis of what impact they could have on the immediate future, built as part of the short term planning.

The goal is to identify only the ones that are reasonably likely to happen. In scenario planning, which can be a tool used to augment longer term planning, remote events that could have a significant impact may also be studied, but this is only to evaluate various scenarios and should not form part of the most likely longer term plan.

 

Longer term planning builds off short term planning and is constantly evolving

 

Managing the long term requires constant re-calibration of the present and immediate future.

Think of hiking up a mountain that you’ve never climbed before. You see the peak and you know that the peak is where you want to get to. You might come across a river too wide to cross and may need to walk an extra hour to find a place to cross it. That deviation might get you to come across another hiker who knows a shortcut (or not and it could just make you a little tired). A fallen tree might seem like an obstacle to climb over but some fallen branches might be perfect for you to build a fire with.

The key is to keep using the present and the current changes to re-chart the course to the longer term objective.

 

There are some tactics that can prove useful in building longer term plans.

  1. Keep the long term objective in mind
  2. Try understand whether the short term impact is temporal and can be ignored or if it impacts ultimately achieving the goal, in which case it needs to be analyzed and merged into the immediate future plans.
  3. If it needs to be merged into the immediate future, does the immediate future get closer or further away from the objective? Is there a way manage through it but keep the long term objective? Or does the long term objective need to change?
  4. Always assess new ways to get to the objective. Nothing is linear and each change provides something to help achieve the objective. Find that something.
  5. Keep the long term objective in mind

 

It is okay to change the longer term objective, and in practice they usually do change to some extent. The important part is having them and working toward them. The second most important part is knowing when to change them.

 

The short term and the long term are not mutually exclusive, they are intricately linked and need top be managed as part of one single process.

 

The CFO

Leave a Reply, Comment or Anything else that comes to mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: