Second in a series from Budgets, Models, Simulations, and Whirlybirds…
The Grass Growing Forever (GGF) trap is a classic case of forecasting gone wild. It generally happens when a group of highly credentialed consultants, investment bankers, financial analysts, or maybe a couple of freshly minted MBA’s from the corporate development group, gather in a room to model an acquisition strategy, analyze the growth potential of a product, or assess the future value of an M&A transaction. More often than not, with no operator in sight, they look at the last three years (or some other legitimate sample period), identify a few critical variables, and create a model extrapolating a baseline growth curve for the next set of years. To make the model work, they include some “accelerator assumptions” that when manipulated produce the classic Hockey Stick Curve that extends upwards into infinity. An Internal Rate of Return calculation is generated; a great PowerPoint presentation is made to the investment committee or budget review team by the most articulate of the group and, voila; a budget with positive earnings and stock price impact is calculated and the plan is approved. Soon enough some poor operator is handed a budget and assigned the task of “make it happen” and off he, or she, goes to deliver what the model promised. Unfortunately, a year or two later, real life does not match the predictions of the model and the search for a guilty party begins.
