Forecasting Fallacy – It’s Not About the Numbers

Date: 13 September 2016
Category: Financial Forecasting
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Financial forecasting is a standard activity at the enterprise level. Big companies create detailed monthly and quarterly projections including revenue, expenses and net profit. Public markets demand it.

So why do so few mid-market executive teams commit to an effective forecasting process? And I’m not talking about the standard back-of-the-napkin annual revenue and profit estimates that take about 5 minutes to create; I’m talking about engaging in the legitimate business process of projecting the numerical values of the business on a monthly basis for the next 12 months into the future.

Here are some of the most common excuses I hear:

• I can’t predict the future
• My accounting system won’t handle this
• Things change too quickly
• We used to forecast, but our forecasts were never accurate
• Our data isn’t ready by month-end
• We don’t have the bandwidth
• Our accountant handles the numbers
• I’m not the numbers person

The last two irk me the most. After working with over 1,000 businesses across the world over the past 15 years, I can unequivocally say this:

If you don’t understand your numbers, then you don’t understand your business.

It’s that simple.

Yet I’m consistently shocked at the sheer number of mid-market companies that fail to engage in an acceptable monthly forecasting process.

That’s one of my favorite Churchill quotes, referring to armies, battle and nations. And it’s just as relevant for businesses.

The problem I see with many businesses is that their leadership team thinks that planning is talking about taking a number that’s hard to understand and potentially irrelevant and placing in a graph or chart and voila – forecasting is done!

That’s not enough.

In my 12 years of speaking with Vistage and TEC groups through the world, I’ve had the unfortunate experience of seeing a handful of businesses fail when some of these failures could have been prevented by using an acceptable forecasting process.

But I’ve also had the good fortune of having some CEOs tell me, “Nick, we would have gone out of business if we weren’t using the 12-month rolling forecasting procedure you recommended to prevent a catastrophe.”

That’s rewarding.

But forecasting is difficult for most businesses, and the #1 mistake that businesses make (aside from NOT forecasting) is this:

When implementing a forecasting process, they jump into the numbers too quickly 

How is that a problem? Isn’t forecasting about numbers?

Effective forecasting is about the process of discussing the following:

1. How the business landscape has changed over the last 30 days
2. How that will affect your business
3. How your numbers are affected by #2

A few numbers dropped into a spreadsheet on a whim is not an effective forecasting process, but having the above discussions with your core leadership team, on a monthly basis, can be. I call this process SON communication.

The real key to financial forecasting is your monthly communication process. Fix this, and you’ll get incredible value from the process.