The application

Don’t expect any information provided to you, or by you, to be greater than you can reasonably measure or estimate.  Thus, if asked for a forecast of sales in three years’ time, the answer should be in the form £100 ± 30m.  The degree of accuracy you will be able to provide will depend on the past data you have and your confidence in the assumptions you have to make.

Some decisions may involve information of varying accuracies.  Supposing you want to set up a restaurant and you need to work out whether, in ten years, you will have any cash in the bank.  The conventional way is to try and estimate the sales, subtract the costs and see if there is any left over.  The problem with this method is that the range of possible sales figures is very wide, after subtracting the costs you may be left with a range of answers from being bankrupt to rolling in money.

However, start from the figures you know most accurately – the cost of renting and fitting out the premises.   You can reasonably estimate the profit you would make from the average meal and can then work out how many diners are required to cover your labour and premises costs.  If the answer exceeds the capacity of the restaurant, or requires you to open 20 hours a day, you know you need to rethink.

By using this method, you have to make fewer guesses and those you do have to make are based on reasonable assumptions.

And so to the practical action...