Forecasts are always wrong: The lesson from Yu Group's accounting disasterby
The energy supplier Yu Group has recovered from the “serious accounting issues” which wiped out its profits and led to a dramatic share price plunge. But the utility company’s travails begs the question: how did they get their accounting so wrong?
The numbers in Yu Group’s latest trading update are mixed. Revenues increased by 77%, but it's in the losses column where the overall impact of Yu’s accounting annus horibilis is manifest: the company’s £711,000 profit from 2017 turned into a £6.2m loss.
The cause of this profit plunge emanates from, by the company’s own admission, accounting and system failings. Notably, the utility company made a slew of fairly rudimentary errors: it had underestimated the number of bills unlikely to be paid and overestimated some customers' consumption.
To the company’s credit, its trading update is honest about its accounting dysfunction. And Bobby Kalar, Yu’s co-founder, reassured shareholders that, “We have made significant progress in implementing new systems and processes and the Board is confident that we have weathered the storm”.
There seems to be a greater degree of certainty over its forecasts now. Further down in the trading update, the company explained, “Whilst consumption can vary from this forecast, the Board has a good level of certainty over the revenue to be expected from its contracts, following improvements to the management of data in relation to revenue recognition processes.”
Still, it’s remarkable that an AIM-listed energy supplier didn’t have this in place, to begin with. Especially since energy suppliers would seem uniquely well placed to do this well. “It is easy to sit on the side and make comments, but it is alarming that a company in that kind of business can get its forecast collections so wrong,” said Hugh Johnson, founder of Accounting Insights and AccountingWEB’s Power BI guru.
“They should be swimming in data about their customers' profiles, consumption and payment patterns. This should all be the basis of pretty robust forecasting. It's all relative, of course, and I am not sure of the proportionality of the error to their overall business.
“If a utility company cannot produce robust cash forecasts, what hope have the rest of us?”
The lesson from Yu Group’s forecasting snafu, according to Johnson, is simple: forecasts are always wrong, so they should be tracked and adjusted constantly.
“The takeaway I think for anyone working in finance is always to look at the numbers and ask the basic question 'do they look right?'. A forecasting error on this scale probably looked ‘wrong’ quite a long time ago, if only it were looked at. Spreadsheets (or any other reporting tools) don't refuse numbers. It is up to us to do that.
“Good practice would always be to have a rough mental idea of what to expect before you look at any numbers. That makes it so much easier to spot something that is way off target. It's a discipline that used to be engrained in us before we got technology and now technology sometimes makes us lazy. If Google Maps tells you that it will take you three hours to walk from Blackfriars Bridge to Liverpool Street you know, I hope, that something's wrong. It should be the same with your financial reports.”