Forecasting: Where Budget and Objectives Meet
Regardless of what stage your venture or the organization you lead is currently in, it is imperative that you have already clearly stated your goals and created a budget aligned to deliberately meet those goals. If you are at a place in your career where you are aware of how your business performs throughout the year and what the projected sales are or if your organization knows anticipated revenues and expenses, you can now start planning and forecasting your next move in ensuring your entity reaches its desired objectives. As I stress to our clients, there is no substitute for sound fiscal management and responsibility where your goals and resource allocation align.
You may not be a CFO, CPA, or know numbers inside and out, and you do not have to be or know. However, you must understand how the dollars must match up and align to the goals. Therefore, being aware of your financial security or lack there of is imperative to your leadership and the organization’s overall success. Start by having a discussion with your partners, owners, or fellow decision makers and discuss the following:
What are our strategic and operational goals? Do we plan to sell/be acquired in the near future or still operate in the next 15-20 years?
What is our most valuable monetary source that drives profitability? How is our revenue generated? How do we preserve that?
Do we all clearly understand our profit margins and revenue streams? Are our expenses balanced?
Where are we losing the most money? Do we have unpaid invoices, unnecessary expenses, or something else? How do we stop the bleeding?
Where can we create organizational efficiency? Do we have the best organizational structure to achieve our stated goals/objectives.
Once you are clear on the above and have an annual budget in place know this: Your budget is static and does not change. While there may be instances of having to shift money for various reasons, overall it won’t change so, stick to it. Your forecasting – An updated track of information that gives insight to your cash position based on real time cash flow – is updated monthly and will help you appropriate cash and business planning in ADVANCE.
Forecasting is a crucial part of strategic finance planning because it forces you to be proactive vs reactive. If you risk going over budget for expenses or not meeting the required budget target, forecasting will bring crucial matters to your attention and when done right and timely, give you a window of opportunity to plan your success or prevent your failure. Because no organization is cookie cutter, my method of forecasting may or may not suit you. However, for teams that I have led big and small as well as my current clients – over 60 at this point – the following forecasting methods helped keep us on track.
Much like the discussion suggested above, team polling involves relying on your trusted team members’ feedback to understand the financial direction of the organization. As a leader, you may already be aware of other moving parts, but you more than likely do not live it daily; thus, their fresh perspective is needed and critical. Your team, especially those close to your clients and perspective clients, should have insight on the behaviors and trends of your audience. In this method of forecasting, key estimates are developed based on sales, additional information, as well as your base’s spending habits.
Time-series forecasting is my most trusted method of gathering data and projections. It is also the most popular form of forecasting across most industries. Time-series involves using data from team polling, yearly and quarterly sales data, analysis of your industry trends, and any other relevant market or entity specific research and studies to make an accurate forecast and judgement call regarding your strategic financial planning and money allocation. Times-series forecasting is a simple measure and is usually accurate because it studies trends over a period of time and uses that data to project upcoming spending and help plan for the future.
The cause-effect method studies relationships and how its variables affect consumer outcomes. This method will force you to answer the following questions:
Are any of my products or services seasonal? Do individuals need me year-round?
Does consumer spending or participation depend on political or economical factors?
What level of consumer confidence must we have before moving forward?
Does our target market need to have a certain amount of disposable income to participate?
This method will help you reach and understand your audience better. Cause-effect method allows you to present your best offerings at the best time and adjust and anticipate spending and profit margins accurately as well as appropriate expenditures.
Again, I realize strategic finance is not everyone’s strong suit and many of us leaders delegate forecasting to a trusted CFO or financial advisor. However, I urge you to be more involved. Not many people know that I started in corporate America and view most things as ROI – Return on Investment. But, I also had to learn a lot. So, this is not just about financial outcomes. No, this is about understanding those you serve and securing the near future of your organization. You don’t have to know every detail or run the numbers and analysis yourself, but as a successful leader, you do have to understand and have a keen knowledge on this process and the results even when tedious. Appropriate forecasting is crucial to achieve desired results. Whichever method you use and however you implement it, do what works for you and allow forecasting to better predict performance and aid you and your fellow decision maker colleagues.