Hello Reader

Forecasting

It falls into a few camps right?

Ideally it’s quite simple:

1. Take historical or related data
2. Apply the impact of current trends -start with external trends that impact - general economic health - industry specific market trends
3. Apply the impact of internal actions that are planned for growth, for example - return on investment of marketing - brand specific market trends
4. Add new geography, divisions, products, services or other changes to the business. What are the fixed costs? What is the anticipated revenue? What costs will grow with success and are variable?
5. Do a deep dive, line by line to reduce or expand

But what happens when you don’t have #1? Say you are in a pandemic and it’s your first one? Or, maybe it’s a new business?

Have you asked for help and heard from operations, “it’s a shot in the dark”?

Have you assigned and heard from your Controller that it’s useless and impossible? S/he doesn’t know where to start.

All of this can be partially true.

So when faced with a blank excel sheet how could you get going?

Here are some ideas:

1. If you can use a poor substitute for #1 it will help you get some momentum. Do you have a similar division that can be a starting point? Can you use pre-COVID to get started?
2. Design the forecast around assumptions and inputs. Use formulas to allow you to easily change those. If you don’t feel good about those variables - that can be okay as you can create scenarios and change them easily. Remember, a forecast is a directional tool. Anyone who expects to hit the exact number doesn’t understand the purpose. If you are anchored on clear inputs you can change those as you learn more. You can do sensitivity analysis around your fundamental questions. For example, if your new service has a $1m budget and after that you need to break-even, earn profit or walk away, then you can adjust the inputs to find out what conceptually looks like your worst case scenario or your break-even.
3. Now go back to #2-5 above and see how much better you can get this work of art. (Good reminder - this is an art so don’t expect science here).

Keep in mind there’s truth to the skeptic challenges. So before you dig too deep or take something too far you should ask what your objective is and what your burning questions are.

There is no value in an overly complex, almost impossible to be right, work of art. Your forecast doesn’t have to be that.

In fact, even if that’s what you do behind the scenes you can’t be sharing that!! You’ll want it to be presented at the same financial statement level of your financial statements or your operational reports. Use reporting that the audience is familiar with.

Financial planning and analysis is much more than this, but we hope that trying to simplify forecasting has added value today.

Oh, one last thing!

If you use forecasting software then this gets done for you when you put your cash assumptions in, but if not, don’t forget the need to do both a cashflow forecast and a profit and loss or income statement forecast. The later will be needed to understand consolidation and for some financial statement users, but the first is what’s vital to a new business. Rarely will one of the two be sufficient.