Monday, August 3, 2009

How Many Forecasts Do You Have?

How many forecasts do you keep concurrently in your company?  If the answer is zero, then we have some serious work to do.  But if your answer is one, you may be falling well short of what is necessary in these difficult economic times.

Here is a real story of a conversation I had with a banker in the last 6 months.  My client needed to finance some heavy growth and we stretching to try and use only bank financing to accomplish this growth.  The banker was concerned about the effects that our plans for growth could have on the business.

He said: "Ken, I have your projections in front of me, and I understand they are conservative, but I'm not going to feel comfortable about this deal until you can show me convincingly that a 25% downturn in this company's top-line will not kill this company."  I agreed to re-work our forecasts based on his request, and I went ahead and ran an additional model with 25% additional growth on top of the already projected growth trends.  In about two hours we went from one forecast to three, and the exercise was overwhelmingly valuable.

In the July/August 2009 issue of CFO Magazine, Tenet Healthcare CFO Briggs Porter said: "Developing a plan on three different levels (baseline, high, and low) is a good idea in any environment, but it is a necessity in this one."  I could not agree more with this statement.  Forecasting is tough enough, but these uncertain times make it even more difficult.  And the stakes are high - if you fail to plan for each scenario, you can quickly put the company in a world of hurt.

Financial modeling and forecasting is an exercise that ultimately only proves beneficial if we use the models and forecast to validate or invalidate our assumptions, make necessary and timely changes in our businesses, and continue to try and stay ahead of the where we are going.  In large organizations, the CFO usually runs and updates the model.

I have and will continue to make this promise to anyone willing to take this challenge: If you will put a forecast/budget in place and track your actual performance next to your budgeted performance every month for 12 consecutive months, you will know more about your business and industry than at least 80% of your competitors and the competitive advantage you gain from the insights and knowledge you will gain during this process will add an overwhelming amount of value to your business.