In any Finance Department there are probably a number of people who would be able to put a forecast together but without the necessary thought and consideration the forecast is meaningless and a complete waste of time.
Forecasting should not just be a number crunching exercise where the result is put on a shelf and not looked at for 6 months. Forecasts need to be a living document that are continually evaluated as the environment evolves and changes. Decisions made 6 months or a year ago may not be relevant today – so make sure your forecast will enable you to make the correct decision today. It is the thought behind the numbers in your forecast that will enable you to do this.
So where to start?
First consider the overall content of your Forecast to get ‘the big picture’. Your forecast is your Business Plan expressed in numbers. Examine your Business Plan and ask yourself these questions to draw up your forecast. What is our business model? How does it translate into revenue? What kind of resources do we need to build our business? What will our cash needs look like at various points in the future? Look for gaps in your Business Plan and fill them in e.g. have you considered depreciation, bad debt, taxation?
Most importantly, get your assumptions in your Forecast right. Your assumptions need to be thought through carefully e.g. instead of guessing how many customer facing staff you need, ask yourself, how many customers can single staff serve? The answers to these sorts of questions can then form the basis of your assumptions. Don’t use guesswork or be wildly optimistic or pessimistic. Be particularly careful with assumptions that have the greatest effect on outcome.
When you have an initial forecast ready give yourself a reality check. Look for benchmarks in your industry and compare your forecast against these to check you are in the ‘real world.’
Remember to use data wisely. It sounds obvious but you need the correct data in the correct format. You will need past data to forecast the future but remember it is difficult to apply data to a specific situation so your forecast can only give a basis for the future but will not be 100% accurate.
Look at your figures a bit more and focus on what is the most important. Try changing some of your inputs by 10% up or down and see what impact this has on your outputs. Where does this have the biggest impact and focus on getting that part of your forecast in the best shape. It’s no good spending ages on fine tuning a figure that has little or no impact on the outcome and not attending to the areas of the forecast where a small change up or down can have massive consequences.
Once your forecast is in decent shape make sure it is reviewed independently by ‘fresh eyes’ to remove any human errors that may have crept in e.g. transposed numbers.
Finally present your forecast with your target audience in mind e.g. don’t make too difficult for your target audience to understand!
If you have all that in place what should you end up with?
Well hopefully a good forecast that is flexible. It should give you potential outcomes and cash requirements under multiple scenarios so you can understand what can change or go wrong. If your forecast is right you can get the right management team in place, the right business model in place and will be able to understand your resource requirements, competitor environment and how to sell products to customers.
A good forecast will also be a huge asset when you want to do business with your bank or vendors or if you need to talk to your shareholders.
So take ownership of your forecast and ensure it is all it should be, so that it can be executed with confidence and not sat on a shelf and never looked at for 6 months. And remember we at Innovar can provide you with expertise and some powerful tools to help you get there.
By Janice Jones