The world is a volatile place and financial forecasts are becoming redundant increasingly quickly. Information prone to wild fluctuations - such as the price of oil, which could well double between quarterly forecasts - can have a tremendous impact on the majority of businesses. According to one study conducted by Adaptive Insights and CMC partner, 64% of annual forecast targets are obsolete after 4 to 6 months. Organizations need to incorporate the constant stream of new information in order to best anticipate short-term outcomes and take action to influence them. And they are. In a recent survey by Aberdeen Group, 71% of top-performing organizations who responded said that they mitigated against risks related to volatile business conditions by continuously updating forecasts to better reflect current business conditions.
This is, of course, far easier for large organizations where they have the resources to commit. Smaller companies, on the other hand, have to be more cautious. Many, particularly startups, also have the issue of rapid growth and unpredictability of revenue. While technological improvements and lower costs have made it possible for smaller companies to update their forecasts more frequently, it is still not necessarily the most appropriate way to allocate valuable resources. Managers are liable to spend all of their time preparing forecasts and not enough completing other necessary tasks, foregoing the strategic, creative role within their organization that they likely want to be filling. It is often more important to simply manage cash flow appropriately to deal with any shocks, and not spend time and resources that could be better spent elsewhere.
We asked five experts what advice they had for startups and other organizations undergoing periods of large growth looking to improve their forecasting processes.
James Butler, Financial Controller at Surf Air
Having models that are flexible, easy to change and that you can audit are key. You will go through tens if not hundreds of iterations of a plan so knowing what is different across each version is critical, especially those that have been presented to your executive team. The underlying growth assumptions you put into the plan are going to be the key driver to the accuracy of the forecast. There is, therefore, no point in modelling every cost down to the smallest detail. Aim for 90% accuracy with a balance between speed and being able to answer questions on how you’ve built the forecast. As a finance leader, it is important that you understand the business. Spend time with each department (or everyone in the company if it's small enough). See the operations, try out the product, chat to people over a coffee about what they do. If you understand the business your forecasts will be better and you will add so much more value. You will see opportunities for growth or optimization, you’ll get more buy-in from your colleagues in the forecasting process and also gain more respect amongst your colleagues.
Nick Fischer, CFO of Betteridge
When the business is growing, it can be easy to overcommit in terms of planned investments due to favorable cash flow expectations. I think it’s important to consider cash flow sensitivity & funding needs under multiple scenarios prior to committing.
Doug Ireland, VP of Finance at Prezi
We are often asking how things could be done faster. Is it structural, or is it resource constraints that we could alleviate with the right business case. On the flip side, it is important to maintain a vigilant stance when everything is moving 'up and to the right', because it becomes easy for managers to get over their skis on commitments. We use historical results of similar initiatives to temper the optimism built into projections coming from business units, and build in stage gates to ensure that projects get funded as they reach milestones, and re-examined if they miss. This allows us to fund riskier growth-oriented projects with the confidence that they are not going to become money pits.
Michael Kaplan, Former VP of Finance at Activision
When forecasting sustained growth, finance leaders need to resist the natural inclination to believe that historical assumptions will continue to hold true in the future. We should always be willing to stress test assumptions. Great finance leaders simultaneously look at both upside and downside scenarios and are not shy to invest to continue to fuel growth.
Matt Carpenter, CFO at Audi
Personally, I believe that market trends warrant more focus than they may receive when forecasting growth (demand-side economics). It’s become too commonplace that we forecast based on internal cost structure and capacity (supply side economics). Finance leaders need to trust the market and consumer-driven data and make investment decisions based more on demand and less on supply.