Introduction

This blog is the fifth in a series I am producing once a week.  There are many topics we can discuss under Corporate Finance.  This series will include a subset of topics, including the following:

• Chart of Accounts
• Project Costing
• Reporting
• Model Set Up
• Forecasting
• Budgeting
• Program Based Fixed Asset Management

Ah, the art of a good forecast!  Building a forecast is a lot of fun, when you have the data, tools and resources to make it real.  What makes a good forecast?

• Executive Alignment: Agree on Scenarios
• Risk Identification: Understand the high risk areas
• Assign Ownership: Inputs only from department leads
• Reasonable: Have comparable as baselines to justify numbers
• Analysis: Seek trending, analysis and outlier information
• Verify: Always validate your numbers and review with others

Following these is the reason executives don’t question my numbers, they know the results are vetted and have approval from the department leads.  And always remember, you didn’t create the numbers, you just report what the department leads told you.  Be consistent in this…they own the numbers, not you (the forecast builder) unless you make the mistake of entering your own numbers (don’t do that unless authorized)!

Forecasting

Let’s start the meat of this blog with cadence and responsibility.  A forecast in many companies occurs as part of month-end close, a collaboration of Accounting and Finance departments.  Accounting is relied on to provide accurate actuals through timely entry of revenue and cost transactions, along with accruals.  Finance needs to understand the actuals and accruals that have been made so these are not replicated transactions in the forecast.  The forecast draft is then created and reviewed with department leads for refinement based on new information, which is itemized as changes to the forecast for explanation.

Now let’s dive into what makes a good forecast!

• Executive Alignment: A forecast always starts as support of the executive level strategies and scenarios. If there is a change in the strategy, this is a major change to a forecast and needs to run through each department for impacts.  Running a forecast without executive input will lead to a very frustrated executive and management team…don’t do it.
• Risk Identification: So many times, I have seen the optimist entering all those beautiful opportunities, and forgetting about the impacts of the risks. Optimistic managers won’t want to load numbers based on risk impacts BUT it is the forecaster’s responsibility to remind the manager of the risks to consider.  If they don’t want to adjust numbers for risks, then you get them to agree to footnote the risks to protect them.  Your job is to have consistency of the numbers and help the manager forecast based on ALL information.  That manager is your customer, so treat them as one.
• Assign Ownership: Inputs must only come from department leads. If they don’t want to load risks into the numbers, then don’t.  Remember, they own the numbers unless you change something…then you would own them.  Don’t take ownership of the numbers, only own the model.  If you disagree with the numbers they want to enter, then your manager is the next step to communicate concerns.  Let them figure out next steps.
• Reasonable: This is where experience in an industry is very helpful, as does having history of performance. If you need further validation of reasonableness, also pulling public company information of a competitor can be very telling.  Look at ratios and explain differences.  If you can’t explain with confidence, you may want to address the department lead for possible adjustment.  This is a major value-added activity the Finance department should offer.  Don’t be passive in your entry, anyone can do that.
• Analysis: Setting up the forecast model to analyze the data in real time helps minimize department leads time burden each month. As you enter updates, be sure you have trend information so they can explain in real-time.  Don’t just ask them for numbers, provide them a roadmap of data history, comparables and analysis so they can provide the route for their business unit.  The more you help them with information, they will stop viewing you as just a numbers person…they will start viewing you as a partner.
• Verify: Always validate your numbers and review with others before reporting out. I have watched others get slammed by executives and the departments they support because of numbers that didn’t roll-up correctly.  It’s painful to watch.  Once they discredit you and your model, you may never get another chance at confidence from the team.  Building the model to automate verifications, and spending 30 minutes to review with peers and your manager, is all it takes to protect the confidence of the team in you and your model.  Worth it!

If you have other methods for forecasting, please share.

My approach is based on my experience, what is yours?  I write these blogs in hopes that it may help others.  I prefer to blog what I have learned from experience, not just a rewrite of what I found on the internet.  I also prefer collaboration over critique, so please comment only if you have something constructive to add. 

If you have other methods for setting up a model, please share.

As always, Contact Us to learn more!

About the Author

Travis King’s educational background is a dual degree in Accounting and Finance from University of Arizona, along with an MBA from UC Irvine.  His operational background is a mix of management in Accounting, Finance, Operations, Program Management, Design and Corporate Strategy.  He has worked in beverage distribution, defense, automotive, software and recreation industries.  He has led projects in forecasting financials, running market data, massive software migrations to SAP, reporting, budgeting, MRP and conducting data integrity audits.