6 Key Components of Financial Forecasting
You wouldn’t drive your car while only looking in the rear-view mirror…why run your business looking only at the past? This is the method many businesses have used for decades: close the books, review the numbers, repeat. While reviewing and analyzing company financials is an important process, you can’t change history.
Forward financial forecasting is a way of communicating your company’s financials while keeping all eyes on the target. The purpose of forward forecasting is not to predict the future, but to influence it. This process minimizes surprises by having employees estimate or offer an educated opinion on what to expect.
While forward forecasting is often associated with companies who practice open-book management, it can (and has) been used in workplaces that don’t share financials. The reason it is most often associated with open-book companies is because these companies typically give a high level of responsibility to the individual (or individuals) who are most closely attached to a financial number. For example, take a look at these roles and the financial number they might forecast:
Sales Manager: Sales Revenue
Janitor/Maintenance: Cleaning Supplies
Scheduler: Overtime Wages
These individuals have direct visibility to the above numbers, know the typical patterns those numbers take and, therefore, can best predict or forecast where those numbers will end up based on a variety of factors.
Now that you have a better idea what forward forecasting is and why you should do it, take a look at the six key components of financial forward forecasting:
The actual results month-to-date.
The forecast: Your best assumption based on the data you have on that number. For example, as the scheduler, you may have an actual number that includes no overtime. However, assume you’re waiting for some parts necessary to complete a big order, which will create a need for overtime at the end of the month. Your forecast would reflect that knowledge.
The risks and/or opportunities involved in reaching the forecast. Perhaps you have a client that is ready to sign off on a big deal, but they must first gain approval from their legal department. Though you forecast that you will close the deal by the end of the month, there is risk in that projection due to uncontrollable circumstances.
The actions you’ve taken to minimize the risk and maximize the opportunity. As Jack Stack explains, “Your forecast is your commitment to the organization. It’s not something you throw out and hope happens. It’s your near-term vision. If you have doubts, go communicate, talk it out and take action; that’s how you beat the conditions.” When you forecast a number, you become accountable for moving that number along. In the example above, the salesperson might work directly with the client’s legal team to ensure the process runs smoothly.
The roadblocks that have you at a standstill with an opportunity. Two heads are better than one, right? Communicating your obstacles openly will allow others to help troubleshoot and determine alternate solutions.
The actions the team can take to help overcome obstacles. When everyone is aware of a potential loss or gain, they typically become willing and eager to help in order to ultimately get a win for the company.
In business, we don’t like surprises. Forward forecasting encourages employees to think about cause and effect, specifically when it comes to how they can influence your company’s numbers.
Written by The Great Game Team