Preparing an Operating Budget—Goals and Assumptions

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Beware of optimistic forecasts

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Personal Insight

One of the strangest things that I've encountered in all the businesses I've been in, and ever since I've been in business, is that I can rarely remember anyone—whether it's in betting hotels, holiday camps, bingo or machine sales—ever bringing me a five-year forecast (which is what most people ask for) where business wasn't always better in the fifth year.

What you normally get, which is quite infamous, is the wonderful "hockey stick" forecast, where perhaps business isn't wonderful now so the graph comes down a bit. Then for the next four years it goes up, and the ending is always Y percentage higher than the beginning. First, one needs to understand why people do that. You're presenting something that might be your own job, your own idea, your own division, your own department or your own business to your boss or a committee of bosses. Very few people want to sit in front of them saying: "OK chaps, I'm going to do much worse in five years than I am now. Can I have a raise?" So, it's very important to remember that.

The other thing is that people are natural optimists: really, most of us are. If you ask people "Will the weather be better next month than it is this month?", nine out of ten people will tell you "yes", because they want it to be—not because they necessarily believe it will be.

And if you ask: "will business be better next month or in five years' time?" most people will say: "yes"; not because they believe it will be but because they want it to be. It's just natural human emotion.

Be aware that any forecast for the future will be optimistic; and the further into the future the forecast, the more optimistic it will be. As forecasts can be enormously important, treat them with as much realism as possible because people are natural optimists and this is likely to be reflected in the numbers.

David Michels

Former Group Chief Executive, Hilton Group

In 1981 David Michels joined Ladbroke Group as Sales and Marketing Director of Ladbroke Hotels. He then became Managing Director of Ladbrokes' Leisure Division in 1983, followed by Managing Director of Ladbroke Hotels in 1985.

He spent 15 years with Grand Metropolitan, mainly in sales and marketing, which culminated in a Board position as Worldwide Marketing Director.

Following Ladbroke Group's acquisition of Hilton International in 1987, David Michels became Hilton's Senior Vice President, Sales and Marketing. In 1989 he moved up to become Deputy Chairman of Hilton UK, and Executive Vice President, Hilton International.

He joined Stakis as Chief Executive in 1991. Eight years later the company was acquired by Hilton Group for around £1.2 billion.

He joined Hilton International as Chief Executive in April 1999 and became Group Chief Executive of the Hilton Group (formerly Ladbroke Group) in June 2000. He left the company in 2006.

David Michels is also a Non-executive Director of British Land Company, easyJet and Marks & Spencer.

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