Many decision-makers wish they had better forecasts. It is frustrating when you know that you would have made a better decision with better information.
Why are business forecasts so often unreliable?
1. Forecasting methods are poorly documented;
2. The performance of the forecasting method used is rarely evaluated;
3. Those doing the forecasting seldom understand the importance of the forecast for resource planning, decision making and the performance of the business as a whole;
4. Probability-driven forecasting based on a pipeline is usually wrong;
5. Sales teams tend to overstate the quality of their prospects;
6. Useful information from outside the sales team is rarely called upon;
7. Different business environments need different forecasting techniques and processes;
8. To many people it all seems too complicated and, given other priorities, forecasting is simply not given the time and energy it deserves.
These reasons don’t mean that you shouldn’t forecast. In fact, they underline the need to improve.
If you can forecast effectively you will:
Make better decisions;
Plan your business resources and purchasing more effectively;
Improve your control of cash-flow;
Look better in the eyes of external funders, potential investors and other stake-holders;
Keep your job!
How you can improve your forecasting?
1. Don’t use one forecasting methodology. At F1F9 we use multiple methods in parallel and, over time, select the methodology that works best for the particular dynamics of each client’s business;
2. Update forecasts regularly. We usually support our clients with monthly updates to their business forecasts. Some clients require more frequent updates, some less frequent;
3. Measure the performance of the forecasting methodology itself against the actuals;
4. Talk to all the people involved in the process to understand why the reality was different to the plan – and refine the methodology accordingly;
5. Don’t just include the sales team; Also involve key operational and finance staff and maybe even customers;
6. Make sure the forecasting model is transparent and usable. Use a recognised modelling standard
Finance personnel spend enormous amounts of time on the regular departmental routines of year end, budgeting, forecasting and producing month end board reports and updates.
When we provide corporate modelling support we typically reduce this time by over 50%.
Better quality, timely forecasting means better decision making.