October 15, 2020
Your Business Should Revolve Around Your Forecast (Not Vice Versa)
Posted by John Kogan
I had an interesting discussion recently with a company leader who said they can’t forecast past three months because their pipeline couldn’t provide visibility beyond a three-month window. And, their pipeline was actually only “good” at the next four weeks of forecast, but it has some deals that might take three months to close.
This is wrong in so many ways, it’s hard to know where to begin. But let’s start with a metaphor.
When I taught my kids to ski, lesson number one after they could do basic turns was, “keep your eyes on where you’re going, not on where you are.” If you look down at your skis, you can’t look ahead. And when you can’t look ahead, even small disturbances in the ski slope will cause you to fall. You’re simply not prepared for them.
Looking ahead is scary at first, and you have to develop coping skills and confidence, but once you do, you would never go back to slowly creeping down the hill and falling frequently. All of your skiing moves are in response to your body and brain reacting to what’s ahead of you. This applies rather directly to financial forecasting.
Forecasting is your organization’s plan of action. It should be the center of all things, and all business activities should spring from that plan. Without it, one has to ask, “what is driving my actions?” If there’s no plan, nothing but your gut is driving your actions, and that is not a plan at all.
There is only one thing that doesn’t spring from the forecast, and that’s your business goals. Those are developed by the business leaders and are the thing the forecast is built to achieve. If you’re not in business to achieve goals, you should again ask yourself what you’re doing and why. Presuming you have goals, your forecast is the plan that gets you from here to there, just like looking down that ski slope.
Pipelines Shouldn’t Constrain Forecasts
That pipeline I mentioned above is not an afterthought, it is critical to the company achieving its goals. But it was put in front of the idea of a forecast, instead of behind it. The way your pipeline works today should not constrain your forecast. No one is going to succeed in business if they are planning one month at a time. Rather, the pipeline should serve what the forecast tells you it needs.
For instance, if you know that you win one-third of all clients you sell to, then you need to sell to three clients for one win. If you know that you need two leads to get to a client you can sell to, you’ll need six leads to get that one win. If your average win is worth $100,000 over three months, half billed up front and half within 30 days of completion, you are now getting a fuller picture of your sales economics and cash flow.
An effective business model builds these and hundreds more assumptions in to create a path to your business goals. Using our pipeline example, it’s not that you limit your business based on short-term sales visibility — rather, you drive your sales and marketing activities based on your business goals.
If you need $12 million in sales to reach your profitability targets, you will need to close 10 “average” deals each month by pitching 30 prospects per month (remember, you need to pitch three prospects to close one win), and you need to generate 60 leads in order to get those 30 prospects. The forecast drives the pipeline, not the other way around!
In fact, the forecast in this example drives your entire sales and marketing organization. It determines how many people you need, how many marketing programs you must run, how many dollars you need to spend, and much more. And that’s just for one product on the sales side. Most businesses have many products and services sold through many channels with varying selling models, all supported by phalanxes of people (internal and external), processes and technology (aka “operating expenses”), capital, and more.
Every ounce of that can and should be captured by your forecast. It is the economic instantiation of your business. Once you have that forecast model built, you can actually predict the future. It’s not perfect, of course, but I don’t think you’ll find a better one for your business.
Your Business’s Central Nervous System
After your forecast model is created, all activity should flow from it. It is your business’s central nervous system. Once it is running, you should update the forecast monthly. That will provide useful information in a timely fashion to everyone in and around your organization and will provide a far more predictable means of running things than anyone’s gut instinct.
This may sound hard if you’re starting from nothing, but it’s very doable. Once your forecast muscles are developed, you will be in far more control of a far more predictable business than ever before. That’s the path to reaching your business goals. That’s finance done right.
Learn more about how we can help you strengthen your financial forecasting.
John leads the Finance Performance Improvement practice, where he helps clients with strategic finance outsourcing, executive search & finance technology solutions. He is passionate about helping CFOs become strategic leaders and make the finance organization a genuine weapon for their organizations.