3 Operating Lessons Learned From Financial Forecasts

Today, I’m going to share lessons I have gained from financial forecasting for operating leaders.

Over my career, I had to develop financial forecasts, execute them, and present results in multiple financial reviews which allowed me to get the “gift” of feedback many times.

Sometimes, I enjoyed the feedback and sometimes, the feedback built my character 😃.

As I’ve grown in my career, I’ve led those reviews and I’ll share 3 lessons I’ve learned from the process that helped me and the teams I’ve worked with.

The challenge with forecasting arises when operational activities are not linked to financials which later causes execution problems.

Lesson 1: The run rate is not your friend. Build Operational assumptions.

Earlier in my career, I would use run rate(meaning historical amounts) for forecasts because all else being equal it made the most sense.

Sometimes it worked. The challenge was when we missed a forecast, it was really difficult to understand why and what we needed to do differently.

This is now what I do differently with our teams:

• Start with what operational activities closest to the forecast(deliveries, calls, labor hours) will drive the forecast. Explicitly list them.

• Determine which owners or teams drive those operational activities.

• Ask those owners or teams for costs per activity assumptions(or revenues tied to those activities) for the period you’re forecasting. This increases ownership.

• Have the owners build a forecast with the assumptions on activities and costs.

• Review the forecast with them to ensure the assumptions are clear and the teams understand which operational activities need to be managed to hit the forecast.

• Bonus: Review the forecast with your FP&A team members to get an objective opinion of the forecast you are submitting. They are usually good at pressure-testing your assumptions.

In short, your forecast is only as good as your assumptions going in.

Lesson 2: Nothing goes perfectly according to plan. Build risks and opportunities.

“What’s your number?” is a frequent request for your forecast you’ll get if you’re fortunate enough to lead a major cost center or P&L.

As an engineer, seemed logical to give them the number in my model with no modification.

I wanted to be precise, right? Wrong.

After a few misses, and seeing others who seemed to always hit their numbers, I learned another lesson. the best forecasters I saw never did this.

Here’s what I learned they did and I started to copy:

• Make a list of what could go wrong. Let’s call these risks.

• Quantify how much your forecast will drop if the risk materializes.

• Make a list of what could go well. Let’s call these opportunities.

• Quantify how much your forecast will improve if the opportunity materializes.

• Subtract your risk from opportunities.

  • Your goal is to make sure that number is positive.

  • Work with your team to build an opportunity list that is 20%+ higher than your risks.

  • Adjust your forecast to ensure you have room to still hit it if things still go wrong.

In short, plan for things to go wrong and plan that into your forecast.

Lesson 3: Spreadsheets alone don’t deliver results. Build actions to support your forecasts, risks and opportunities.

“Wishes aren’t horses.” That’s the mindset I’ve learned to adopt in achieving forecast I’ve committed do.

This means after your forecast is complete, you still have to actually make it happen.

Here are 3 actions I’ve seen to deliver my forecasts after it has been submitted.

• Develop a list of tasks with your team to mitigate the risks you identified in your forecast

• Develop a list of tasks with your team to realize the opportunities you identified in your forecast

• Build daily or weekly reviews to monitor the operating assumptions you developed during your forecasting process.

By incorporating these lessons in your process, you’ll increase your chances of achieving your forecasts.

That’s all for now, I hope you found it useful

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