The 10 Key Issues : Issues 6 & 7
The fourth in a series of articles about the 10 key things that you will need to either know, have, acquire or do if you’re going to get the forecast you want.
Issue 6 : Flexing your forecast
In a nutshell : An ability to flex outcomes is central to the purpose of a good forecast. It’s what gives you insight into your numbers. The single final version you publish is not as important as what the flexing of various scenarios can tell you.
Time to get a bit philosophical. Something we all need to remember: a forecast is NOT a crystal ball. The only thing you can say with absolute certainty about any single financial forecast is that it shows you what is NOT going to happen. It’s interesting sometimes to watch what happens when someone gets their first forecast. They start to believe it. (“This time next year we could all be billionaires Rodders…”) They start to think that because it says so on the spreadsheet it’s going to happen. Wrong. Or at best, unlikely.
Instead you need to recognise that the point of a financial forecast is to serve as a map. It’s a map of the terrain you face ahead of you in your business journey; it’s not a picture of the journey itself. Now if you’re trying to get from one side of a city to another you can reasonably rely on the map in your hand to reflect the terrain you’re going to face. The odd set of road-works perhaps or a new pedestrian street, but broadly accurate. The trouble with your business terrain is that parts of it are constantly changing and difficult to predict, so what you actually need is a map that’s capable of showing you the ways in which it could change, and alternative routes you could take - and the resulting financial implications.
So that’s what a good forecast does. It allows you to flex different outcomes – to see potentially different circumstances ahead. Can you afford to move into those new, more expensive premises? What’s the minimum increase in sales you’ll need to pay for it? What happens if you lose that major client? That new contract you’ve just won - can you now afford the new member of staff you need? How do your capital allowances affect next year’s tax-bill if you buy that piece of machinery now?
The forecast’s overall effectiveness lies not in the final report you print and give to your bank manager or prospective investor, but in what various versions of it tell you about what really drives your business and what opportunities and threats you face. Depending on your business and what you’re trying to achieve this will be more or less important to you but it’s vital that you assess how much you need it, and make sure that your chosen forecasting or modelling solution delivers it.
The process of flexing your model has some key practical issues associated with it. The ability to ‘goal-seek’ can be important - that is “reverse modelling” to see what inputs are required to produce a particular outcome (break-even being the most obvious). Another is the issue of version control. The business of flexing requires some discipline over the concept of “other things being equal” - for meaningful comparison you can’t change more than one or two variables at once, and you need to be able to keep track of different versions and know which one you’re looking at. If flexing is important to you, make sure your chosen system delivers good version control.
Issue 7 : Reporting
In a nutshell : There’s little point in doing any of this if you can’t communicate the end result. Quality reports that are easy to read and to print and distribute - and that make you look good - are usually essential.
There’s no point doing it all if you’re not going to communicate it to someone. Sooner or later you’re going to want to print it out or distribute it electronically. So in most circumstances the file format and printed output of a chosen forecast is important. How important harks back to your objectives, but generally you need two main things from your reports.
First they need to communicate effectively. They need to yield their information easily and be logical and simple to follow. Depending on your audience it’s important they look professional and reflect well on you and that they do
justice to the ideas they are designed to support. Best practice dictates there should be a sensible hierarchy of information with headlines at the front and gradually more supporting detail where required behind. Are the pages well-labelled and is there a contents page?
You may also want to look deeper about how easy it is to customise reports to say just what you want to say. The bog-standard is fine in many circumstances, but sometimes you may have an unusual or specific reporting requirement that needs to be accommodated. Keep an eye out for it, or risk being frustrated.
Second, they should be easy to print, save and distribute. I’ve seen hours and hours wasted in wrestling with spreadsheet print settings and page numbers. Depending on your precise needs, and the tool you use, don’t underestimate the time you may spend on these tedious practical aspects.
Read Next Article : Issues 8 & 9 > Continuity & Expertise
In a nutshell : A good forecast comes into its own when it’s updated with actuals and reviewed. But if this is your aspiration you need to make sure your forecast is built for it.
In a nutshell : Don’t underestimate the expertise you may need and be wary of using in-house staff who may not have the spare capacity to guarantee completion in the required time-frame.