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Prediction is very difficult, especially about the future, said Nobel Prize-winning physicist Niels Bohr. Indeed, the one common factor all prophets and forecasters share is being wrong.

Not just the crass errors - like saying heavier-than-air craft are physically impossible or that only four computers should suffice for the whole of the United States - but even the detailed, careful and relatively short-term errors, such as what the level of sales will be this time next year, are almost always wrong. They are frequently as wrong as denying the imminent arrival of a hurricane in October 1987, or the American assertion its forces would be greeted with universal enthusiasm in Iraq.

But that does not mean a sane businessman throws up his hands in horror, abandons planning and talks of the inherent impossibilities shown by chaos theory. It makes planning not only possible, but also essential.

There are several crucial errors made by companies through the absence or inadequacy of their plans:

• Borrowing too much money;
• Borrowing from expensive sources when cheaper ones are available;
• Not seeing the need to borrow more until very near the date the cash is needed;
• Distributing too much of the profit rather than re-investing it;
• Production being out of line with sales;
• Too great a dependence on a single supplier;
• Too big a percentage of sales going to a small group of customers;
• Failing to allow for changes in economic circumstances - interest rates, consumer demand etc;
• Failure to control overheads.
  

Most people can think of others as well. Managers and finance directors know the value of producing management accounts and proper business plans but receivers and liquidators are perpetually astonished at how badly the work is done and how little attention is paid to the results.

Obviously the first step is to make a stab at assessing demand for the company's products (one can assume services are a sort of product). At the very least that requires looking at the macroeconomic state of the country. There are several very clever groups of people producing forecasts for the state of the economy - such as the Item Club which uses the government's own financial model to assess likely outcomes. Businesses can subscribe to several of these services or read about some of them in the papers.

Their record tends to be patchy. Few are good at predicting downturns in the economy. In any case, an econometric model is just a big computer churning through relationships we all know about in the hope they will remain constant and that lead indicators are still reliable. The best ones are fairly good but none is completely dependable.

On the other hand, it does not require an economic genius to see that, for instance, house prices becoming sluggish, the price of petrol being high, taxes rising and Germany, Japan and the US going through a rocky patch in their domestic economies probably portends a stickier time ahead. It may not entail a full-scale recession but may well cause lower demand, greater price competition and tougher terms for borrowing money.

Similarly, roaring consumer demand, a weak pound, falling interest rates, soaring house prices and booming economies around the world could well mean healthy sales and profit margins.

That sort of process is part of the first step in calculating demand. It is surprising how often a personal inspection provides a useful indication of the state of the country. Taking a look in the major shops to see how crowded and busy they are, walking down commercial districts to see how many shops are up for sale, talking to estate agents to get a feel of price movements, testing one's own inclination to spend or save, talking to customers about their feel for the immediate future, are all practical frontline inputs when deciding how good the published projections are.

The level of forecasting beyond that, for the company, is just as tricky but demands more rigorous tools. There are investigations into the state of the market and the direction in which it is moving and the likely state of competition. The size of the market segment may be determinable from predictions about the economy as a whole, but market shares within it can change dramatically as British Airways, Sainsbury's and Marks & Spencer have demonstrated. As those examples suggest, nothing sensible can be said about how a business will perform without knowing what its competitors are up to and which way they and consumers are driving the market. That may demand market research as well as talented marketers with a feel for the way the future is moving - yet another example of supplementing scientific research with sensible and able human assessment.

From that process a price policy will also emerge: in other words, what you can reasonably charge in the light of the competing and alternative supplies. Price elasticity of demand is pretty hard to calculate for most industries. In theory, rising prices will reduce sales - or so the economists tell us - but in some cases, if you can add a feeling of quality and prestige to the product, it could even increase demand. Besides, it is all dependent on not just competing but alternative supplies. Yet, with the quantity and price calculated over a range, the total income of the company becomes apparent.

Probable costs, such as raw materials, energy prices, taxes, wages, rents, cost of money and cost of equipment etc, are rather easier to discover. Once again there are experts around offering to tell you how things will be but, for this too, common sense has often proved to be at least as good a guide. That does mean wishful-thinking, prejudice or blind stabs in the dark, but careful sensible inspection of what is going on and what people (as opposed to economists, politicians and journalists) are saying and doing.

At this point the process can get more grown-up. Knowing revenues and outgoings allows an assessment of profit. It is only sensible to then check whether the return on investment is enough.

What is enough depends a range of factors, including the capital intensity of the industry, the rate of inflation, the cost of capital and the riskiness of the industry. So although there is no right rate for the world, there is one for each company and it is the job of the board to establish it and, at least, meet it.The important thing is not to get lost in numbers and lose track of what all the effort is for. That is, to make the company prosper and grow.

So, having established all the criteria and all the numbers, the wise finance director goes through them again. In both booms and busts, however, there is a fail-safe system to build into the planning process. It is a management trick now so old-fashioned it is rarely mentioned though it is still a useful guide. It is called 'minimax' - minimising the maximum loss - and it applies in upturns as well as recessions.

To supplement all this profit-and-loss planning, however, the business also needs a cash-flow forecast. Many an outfit has forecast profits at the end of a year it never reached because the negative cashflow sank it before it got there. At the very least it will enable discussions with the banks about when exactly the overdraft provision will have to be raised.

All of this has become a lot less difficult than it was, since there are sophisticated computer programs that will build corporate models, some of which can even be linked to data coming out of national models. That then enables a finance director to play around with a range of inputs to see which of the variables causes a serious catastrophe and which merely a bad headache.

The businessman confused by forecasting might like to note what was written in an essay commissioned for the Chicago World Fair in 1893: "All history goes to show that the progress of society has invariably been on lines quite different from those laid down in advance, and generally by reasons of inventions and discoveries which few or none had expected."

Or as the French writer Bernard de Jouvenel said in 1967: "It is utterly impossible that a mathematical formula should make the future known to us, and those who think it can would once have believed in witchcraft."

Michael Becket's 30-year career with the Daily Telegraph culminated with his appointment as Small Business Editor. He was for six years a civil servant, has worked in market research and for Shell, and ran his own publishing company. He has written several books on computing and business, the most recent being Starting Your Own Business (Macmillan).