Service businesses have a high proportion of fixed and non-discretionary running costs.
Because if this a rolling 12-month revenue forecast becomes the key leading indicator of the future, because fluctuations in profitability usually directly correlate with fluctuations in revenue.
That is, if you can estimate the level of activity and achieve your revenue target you’ll go close to making the amount profit you expected, assuming you control your costs .
Given the high level of dependence on a forecast then, make sure you evaluate strategic decisions using dependable numbers. Break down the big picture one assumption at a time, then sort out fact from fiction and make people accountable for delivering on their promises.
Forecasting is a planning tool. It is a creative process using analysis, estimates and assumptions to predict ‘A future’. (Nobody can predict THE future).
Good forecasts allow you the user to drill down into the granular detail to examine the analysis underpinning assumptions and test their ‘reasonableness’. (things like sales volumes, pricing, wages, materials, capacity, utilisation etc)
Sometimes a subjective call is needed, however this relies on professional judgement, backed up by an appropriate level of analysis. But this is a far cry from plucking figures out of thin air, then having key people washing their hands of any ownership.
Best practice is to run scenarios, of the best, worst and likely case. It forces you to think strategically of the future and gives you the ability to anticipate, evaluate and navigate.
This allows you to have contingency plans in place “if this or that happens” to mitigate and seize opportunities, rather than be reactive and hope things work out. (NB hope isn’t a strategy)
At some point in the future, you’ll need feedback to evaluate how the strategic plan is playing out and to do so, you’ll need quality actual reporting. The trick is to understand the capabilities of the reporting system and build a forecast that captures data at the same level, in terms of granularity, so you can quickly do a variance analysis and pinpoint what’s working and what’s not.
David Dillon is a Fellow of CPA and CA, has an MBA and over 30 years of corporate experience. He has been the Managing Director of Custodian Backoffice, a specialist Virtual CFO business since 2014. He is also a committee member of the Virtual CFO Association + Author of “3-Levers” https://mailchi.mp/1453761b50c9/cfy6cguw3u “Profit Metrics” and e-book “So, you want to be a Virtual CFO” https://vcfoassociation.com.au/so-you-want-to-be-a-virtual-cfo/