Forecasting - 7 Practical Tips for Predicting Your Company’s Cash Flow
I had an accountant of 40 year tell me that at one company he used to work for, the accountants on the accounting team took bets on who could get their forecasted company profit margin within 10% of the reconciled number at the end of the year. No one walked away the winner.
The fact is that forecasting includes many uncontrolled factors. Industry wide changes, local economic changes, industry shifts, inflated industry standards, and so much more can throw your forecast so out of whack that you just want to throw out that tired old spreadsheet and pretend like everything is going to simply, “Work itself out.”
While I feel your pain, don’t give up on forecasting just yet. You need a plan and their are ways to keep your plan up-to-date, making appropriate adjustments as you go. Here are some practical tips I’d encourage you to consider when forecasting.
Revenue Forecasting: This Requires an intimate knowledge of your packages & clientele. It’s important to evaluate your streams of revenue through a “every kind is different” mentality. For example, some clients may be paying for similar goods or services but through a customized payment plan, or via a discounted rate. Another example, you may know that one of your larger clients is considering scaling back their goods or services next month. Factor these potential revenue changes into your model.
Expense Forecasting: This requires broad knowledge of your company as a whole. Make sure to evaluate your expenses with a clear understanding of how they may adjust with growth. For example, you use a subscription based HR solution platform that charges $12 per added employee. This requires you to anticipate how many more employees you intend to hire this year to accurately understand the true expense.
Details Matter: If you get to the end of your forecast and something seems off, it probably is. This is where I can’t say enough, check every number twice, three time, four times, and…well you get the picture. If you have even one number in a million off, it will launch the whole thing out of orbit and into the stratosphere.
Books Generated Reports: These are not forecasts. Repeat, you can not pull a number from your books and say, “This is what we will make this year cause it’s what we made last year!” These reports are a foundation for your forecast, but not a blueprint for it.
Frequency: Adjusting the forecast sucks and no one wants to do it. Do it anyway! I recommend you take time out at least once a quarter to reevaluate and make adjustments to your forecast.
Realism vs. Optimism: Don’t forecast like you are going to outsell all your financial problems this year. Also don’t forecast like your industry is going to collapse tomorrow. If you forecast to extremes, you will make terrible decisions. You realists might be saying right now, “Prepare for the worst and hope for the best.” Translation, forecast like you will lose profit, then if you gain profit you will be pleasantly surprised and if you lose profit, you will already be prepared for it. This works on a personal level but not on a company level, because when you project a loss what do you do? You reduce expenses. In other words, you cut team members or other things you will need in order to grow your profet. This is the very definition of a “self-fulfilling prophecy”. That being said, it’s okay to forecast with a hint of realism; just make accuracy your biggest priority, not covering your tail.
Human Proofing: Human proof your forecast. There is no simpler way to say it. If you are using a traditional spreadsheet, build in formula’s that require the least adjustment and will always bring the same mathematical precision. If you are using AI related platforms that pull data from your books software, make sure to build in customization. No computer can know anything you don’t tell it; so tell it what you know. NOTE: If you are interested in setting up AI automations that create understandable and relatable forecasts and KPIs (Key Performance Indicators) Michael Green Virtual CFO can set that up for you.
I know that looking into the forecasting crystal ball can be stressful, but implement some practical approaches and don’t give up! You won’t regret it.
Need a professional to advise you and set up systems that can prepare your company for it’s financial future? Contact Michael Green Virtual CFO for a free evaluation.
