Forecasting predicts (a) future
A rolling 12-month revenue forecast becomes one of the key leading indicators of the future, because fluctuations in profitability usually directly correlate with fluctuations in revenue.
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.
Whilst some may say predicting the future is nothing more than the dark art of ‘crystal balling’, traditionally used by fortune-tellers, many others would agree that whilst not a precise science, done well it is far more useful that a stab in the dark.
Henri Poincare a famous scientist who made significant discoveries in several fields, is often referred to as the last polymath (someone who is great at physics, maths, philosophy and physics).
Henri Poincare once said, “It is far better to foresee even without certainty than not to foresee at all”
The one thing about forecasts are that they are generally out of date by the time the ink’s dry. Forecasting is a dynamic process, that pushes up into and feeds off your sales/marketing funnel mapping out your potential opportunities. The ‘funnel’ where work comes from becomes transparent and makes your sales pipeline visible. Done right, it puts you out in front of your business and closer to your customers, as you manage the relationships.
Excuses people often make are that they are too busy, it is too complicated, it is guessing. But the alternative is to simply not do it and have no visibility or predictability, like driving a car blindfolded.
A CFO is naturally drawn toward the sales funnel as they strive for predictability in the forecasting process, but be careful not to get sucked in.
Somehow a CFO needs to extract objective details from non-financial people and a subjective process. A BDM (Business Development Manager) can make an opportunity sound earth shattering, but you can’t really size it up until you chart the following.
- Who is the client – where is the job
- $ How much
- % chance of winning the job
- Start date
- End date
- Shape or profile ( straight line, stop/start, exponential etc)
“Everyone is in sales “, but assumption owners are the ones who are delegated responsibility +rewarded for delivering the revenue target. They need to be accountable for their predictions, which flows uphill until the buck stops with the CEO. It can lead to some tense stand-offs, (BDM’s are uncomfortable about being pinned down) – but nobody is better placed to make the ‘informed guess’ than those closest to the action.
Forecasting is a planning tool. It is a creative process using analysis, estimates and assumptions to predict ‘A future’. (Nobody can predict THE future).
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)
Forecasting is one of the 5-Pillars of ‘Profit Metrics’. The ‘Profit Metrics’ method embeds reliability and predictability into business finances. It allows owners to anticipate, evaluate and navigate. It enables them to get out in front of the business, be strategic and boost their bottom line. Nobody can predict THE future, but the alternative is to simply not do it and have no visibility or predictability, like driving a car blindfolded.
For more information about Profit Metrics, please click here
