Top tips for preparing a financial forecast

Do’s;

1) Prepare a regular forecast

It's surprising how many businesses simply do not do this. Don’t let failure come as a complete surprise. You will get rewards if you take forecasting seriously. Show that it matters by leading through example.

2) Include different people

Multi-disciplined teams from sales, operations as well as finance are best. They will give you a range of perspectives. The process will help prepare the managers involved for the collective decisions that they will need to make in the future. This is what forecasting is really about: preparing for things that could happen in the future.

3) Think about bias

Everyone is prone to a bias of some sort. Whether this is based on ignorance, previous experience or a desire to look good, the mistake is not recognising this and not doing something about it. The biggest bias is that we are all programmed to be optimistic – tone it down: prudence is the best way. Also, get your team to talk about their biases.

Don’ts;

1) Confuse a target with a forecast

A target is what you would like to achieve. A forecast is what you think you will achieve. These two things are very different. Try your utmost to set the right culture for honest forecasting. You don’t want people to hold back bad news because they think they are going to miss out on a target or related bonus.

2) Provide single line forecasts

Forecasts are all about predicting uncertainty. Inevitably there will be a range of possible outcomes. It is therefore always best to consider a range of possible assumptions and outcomes when preparing your forecast.

3) Disappoint

This tip is about communication, not really about the forecast itself. Think about who is going to be using your forecast and what actual result would be disappointing for them. Communicate a credible forecast which means the actuals are less likely to be disappointing. And to be clear, yes, I mean lowball your forecast as much as is credible. This will help not just you but also whoever you are communicating it to.

4) Shrink your horizons

Too many forecasts only look as far as the next year-end. This means that the prediction period shortens as each month progresses.

5) Make your next forecast until you you’ve reviewed the previous

If you want to improve your forecasting you will need to take time to understand why actual results differed from the previous forecast. Use these reviews to refine your thinking, more closely identify the forecast drivers and continuously improve your forecasting technique.

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For more information, please contact Lara Brennan or your usual contact.

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