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  • About Us
    • Nick Setchell – RealTime CEO
    • Vistage & TEC WorkshopsNick Setchell has been working with Vistage, the world’s largest CEO organization, since 2001.
    • NewsSee what’s happening with RealTime CEO.
    • Economic Update Report
    • Contact UsReach out to us. If you’re interested in booking Nick to give a keynote address or workshop at your conference, please include the date and location.
  • Concepts
    • Fiscal Focus Financial Statement AnalysisUnlock the hidden numbers in your P&L and balance sheet to see how you’re performing in 11 vital metrics.
    • Should We? / Can We?View, in real time, the actual financial impact of the hundreds of business decisions your team makes every month.
    • 24 Month Rolling ForecastingBlend your trailing twelve months with a rolling 12-month forecast to get a complete financial picture of your business.
    • J Curve ManagementTrack the number of investments you’re undertaking, the 3 phases of each, and the 5 rules for managing them.
    • Return on Operations – ROOView your return on operations percentage — your ROO % — the most powerful number to measure business success.
    • CEO Performance AnalysisBenchmark your performance as a private-company CEO against others in your industry.
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RealTime CEO Blog


Forecasting Fallacy – It’s Not About the Numbers

Date: 13 September 2016
Category: Financial Forecasting
Tags:

business people meeting to discuss financial forecasting

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.

forecasting fallacy not about the numbers

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.

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