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SWAG Technique

SWAG Technique

During the Vietnam War era, the military coined the term SWAG – Scientific Wild-Ass Guess.

CBS released “The Uncounted Enemy: a Vietnam Deception” in 1982 which highlighted the US Army and their “manipulation” of facts and figures during the Vietnam conflict. CBS claimed that  General William Westmoreland and other military officers were conspiring to misrepresent information, resulting in America being convinced that we were losing the war.

After the news program was released, General Westmoreland filed a$120 million libel suit.

SWAG: Scientific Wild-Ass Guess

In the heat of battle, the military did not have access to facts, figures, graphs, or wifi connection to research what the actual answers were to questions posed by journalists – i.e. the tactics that the Vietnamese were using, the strength of the Vietnamese, how many Americans were down, or when the next shipment of goods was coming in. Because of this lack of hard information, the military gave estimates based upon what they thought was correct at the time.

CBS did not realize that the information they were given was based upon assumptions and reported it to the American public as fact.  Once they realized their mistake, they apologized to General Westmoreland. The libel suit was eventually dropped in 1985.

The lesson… Sometimes, you gotta use SWAG.  But, you better make sure your audience knows it’s SWAG.

So what does the US Army’s term, SWAG, have to do with being a financial leader?

Often, in business, we’re in the tough spot of needing to make a decision quickly without enough information.

“Tom, I need a flux analysis. Can you have it on my desk by the end of the day?”

“Uh…”

Sound familiar?

SWAG vs WAG

So, what’s the difference between SWAG vs WAG? WAG = Wild-Ass Guess. It has absolutely no thought behind it and can cause a multitude of issues down the line because it was simply something you pulled out of thin air.

“Sure, I can have it to you by the end of the day.”

What’s wrong with that statement?

  1. You didn’t think about the time required for the analysis
  2. You’ve already promised to have X, Y, and Z by to Bob by the end of the day as well

Avoid WAG at all costs!

As seen in the the libel suit, even SWAG can have negative consequences if not communicated that that’s what it is (a guesstimate). SWAG might sound like this:

“It’s possible that I can get you the Flux Analysis by the end of business day tomorrow. However, the likelihood is that it will take 3 days to complete, but no more than 5.”

There is never enough information available to make the right decision, but you can make a smart decision using the information you do have.

Offer a Range

People tend to understand that when a range is given, it is a best guess. There are so many factors that play into any estimate, including impressions, experience, and rough calculations among other things. A SWAG is not the best estimate, but rather the estimate with the most information at a given point in time.

For example, Houston, TX is known for its traffic. If your friend wanted to know how long it would take for you to go to the other side of town, what would your response be? (Notice the differences below.)

WAG: “It’ll take me 30 minutes because that’s a good estimate.”

SWAG: “Since it’s 4:00 and I’ve had experience with Houston traffic at rush hour, it will take me anywhere from 30-50 minutes for me to get to the other side of town. If there are any accidents on the freeway, then it may push me to over 60 minutes.”

Estimate: “According to my GPS, it will take me 41 minutes to get to the other side of town.”

By offering a range, you now have some wiggle room if things don’t go as planned. Figure out the low and high end and provide an explanation with your answer. Explain some assumptions as they could affect the different points in the range.

One area where SWAG is particularly important is with projections.  You will never have perfect information to make spot-on forecasts. Knowing your basic unit economics is one tool that you can use in conjunction with the SWAG technique.

(Do you know your economics in order to make a SWAG? Download the free worksheet here.)

Check Assumptions

Update your SWAG as soon as you get more information that would result in a more clear picture. If you are producing projections for the next 5 years, what assumptions are you making as you create the forecast?

SWAG TechniqueEconomy, customer demand, and international trade are three of the more volatile factors in a projection. Is the economy going to boom or is it going to continue to decline for 6 more months? Look at how that’s going to affect your customers. Keep an eye out for factors that are impacting your customer in a way that might have an effect on your company. Read the news. Embargoes, strikes, and natural disasters could have a massive impact on what your assumptions.

Check them and recheck them as more information comes in. Remember, it is okay to adjust your previous range and assumptions.

Manage Expectations

Think of ways you can validate your assumptions and form a more firm estimate. Not only will this give you more information to impact your company’s financials, but it will allow you to think through all the possibilities in order to give a range under certain assumptions.

Utilizing the SWAG technique has its risks. General Westmoreland didn’t expect that giving a statement to a reporter would eventually result in a libel suit.  But some information is almost always better than no information.  SWAG can be a powerful tool if expectations are managed.

SWAG Technique

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SWAG Technique

Sources:

No Uncertain Terms by William Safire

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5 Tools You Might Not Be Using (But Should)

Historically, CFOs have relied upon traditional financial statements to guide their decision-making.  Today, the prevalence of more sophisticated accounting systems and the demand for more information more quickly has given rise to the need for different kinds of reporting.  Here’s a list of 5 tools that can help give you manage cash, identify areas for improvement, and plan for the future.

5 Tools You Might Not Be Using (But Should)

Daily/Weekly Cash Report

The Daily (or Weekly, depending upon how tight cash is) Cash Report gives a snapshot of the daily/weekly cash position as well as a forecast of expected cash inflows and outflows for the day/week. In a cash crunch, using this tool daily can be a lifesaver.  Highlighting projected cash shortfalls can help focus efforts on collecting receivables or generating revenues.  Once the cash crisis passes, preparing this report at least on a weekly basis can help the CFO determine if the cash balance is growing, or if it is being used elsewhere in the business.

Click here to learn more about the Daily Cash Report.

Flash Report

The Flash Report, or financial dashboard report, provides a periodic snapshot of key financial and operational data. This one-page report can be prepared on a daily, weekly, or bi-monthly basis, depending upon the availability of information and needs of management.  It is divided into three sections:  Liquidity, Productivity, and Profitability. The Liquidity section focuses on operating cash flows and the cash conversion cycle.  The Productivity section lists key performance indicators (KPIs) to track changes in operating productivity. The Profitability section shows an estimate of profitability for the period.  The key to using this report effectively is not to make it a mini-P&L, but to only capture and track that data that is useful in decision-making. Otherwise, it’s too cumbersome to prepare and gets put on the back burner.

Click here to learn more about Flash Reports.

Projections

Most companies prepare an annual budget, but not all prepare projections.  What’s the difference?  A budget sets the company’s goals while a projection defines its expectations.  Budgets are static and are often useless shortly after they are prepared.  By contrast, projections are dynamic and adapt to changing conditions and expectations.  Projections should be updated with actuals monthly and forecasted numbers (such as sales) should be changed going forward as better information is obtained.  While many companies prepare projected income statements and possibly cash flow statements, few prepare a projected balance sheet. A projected balance sheet is a key tool used by lenders when deciding whether to invest in a company.

Click here to learn more about Projections.

Fluctuation Analysis

A Fluctuation (flux) Analysis, also called common-size financial statements, looks at changes in the income statement or balance sheet expressed in dollars and as a percentage of sales or total assets. Prepared annually or as needed, this report looks at changes over a four- or five-year period and is useful to identify “slippage” or small changes in accounts over the course of years that might not show up when looked at as raw dollars only. For example, a 2% increase (as a percentage of sales) in COGS wages over a four year period may not seem like much.  But in a $50 mm company, that’s a million dollars of slippage!

Click here to learn more about Fluctuation Analysis.

Ratio Analysis

If you’ve ever put together a loan package, you’re probably familiar with Ratio AnalysisBankers love this tool! They can use it to compare your company to others in your industry and market using established benchmarks.  It’s also a useful tool for CFOs for the same purpose.  Is your company as profitable as it should be?  Sometimes it’s tough to know unless you’ve compared it to others in your industry.  Looking at key financial ratios is also useful to track trends within the company year over year.  If your banker is looking at it, shouldn’t you?

As you can see, there are many other tools besides the financial statements that can help you make better, more timely decisions and plan for the future.   Which tools are you using in your business?

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs. 5 tools you might not be using

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

5 tools you might not be using

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