How to Make an Accurate Annual Forecast
Written by The One Page Business Plan Company, on December 5, 2021
These three actors are are the best predictors of forecasting success… the past forecasting performance by the CEO, the past forecasting performance by the CFO, and the likelihood of distasteful consequences If management misses Its forecasts.
Past Forecasting Performance of the CEO
Companies often miss forecasts because the CEO he or she may decide that priorities have shifted and want to pursue another direction or may panic and start to look for other solutions. In some cases, the CEO just does not like the discipline of sticking to plan.
It is true that circumstances sometimes call for a change. Yet this implies that the management team was unable to foresee the situation when the forecast was originally created, a failure just as bad as undisciplined spending or insufficient sales.
The CEO can single-highhandedly cause the company to miss its forecast. Looking at his or her past behavior is critical to any assessment of probability for hitting the next forecast.
Past Forecasting Performance of the CFO
While many people will provide input to your forecast, there is one person… often the CFO in a mid-market company… who drives the forecast. That person’s track record is crucial. Only through much experience can a forecaster learn where slippage usually occurs. They know where the surprises often lurk. Additionally, and most critically, they learn to include the costs and items which inevitably make an impact on the forecast but are usually overlooked.
Creating the forecast is only the first step. Staying on forecast requires an active financial manager, who not only monitors what has happened, but projects what is going to happen—or fail to happen—in the immediate future. Having such a CFO on board (or acquiring one) significantly increases your accuracy of forecasting, provided this person is not overruled too often, or sidelined.
The Likelihood of Distasteful Consequences If Management Misses Its Forecast
The stock market punishes public companies immediately if they fail to meet their forecasts. As a result, they are more likely to pour time and effort into setting realistic benchmarks and fighting hard to achieve them. Yet in many private companies, missed forecasts are met with shoulder shrugs. There are no consequences for poor forecasters.
In fact, there is often more pressure to agree to an overly optimistic forecast than there is to achieve the forecast. This is a mistake of great consequence. Pressure to perform is a critical factor in all business operations. Identifying missed forecasts as failures and delineating serious consequences for those failures increase your likelihood of hitting forecast.
If we have confidence in our forecast, we can spend more aggressively. If we do not, we must hold more cash in reserve, to allow us to recover from surprises or potentially to try again. Determination of optimal spending velocity stems from understanding the level of market predictability, the proven ability of your team to execute, and the likely accuracy of your forecast.
Spending too much too fast can leave a company at a dead end—with no money to shoot for success a second time and owning a track record that won’t impress any new money sources. On the other hand, spending too cautiously when a strong team sees a strong opportunity often results in the loss of that opportunity to competitors.
Before you lay down a significant bet, spend time and effort on assessing market predictability, execution competency and your team’s forecasting acumen. Then make the decision about your spending velocity and the level of risk that is prudent!
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