It should come as no surprise that I’m a fan of forecasting. You’d hope so, given I’ve devoted close to 25 years of my life to the field. But even now, after all this time, I’m still enthralled by the transformative power of a great forecasting process.
Every great business, no matter the size, the geography or the industry is built on rock-solid financial foundations. Without the right financial disciplines, a business will never fulfil its true potential. And given the SME sector employs over half of the world’s working population, that matters.
That matters a huge amount.
The global economy needs the SME sector to be robust, vibrant and, ultimately, successful. And as we’ve all seen time and time again, solid financial foundations give these SMEs the freedom, the clarity and the cashflow to be robust, vibrant and successful.
It’s a simple equation, but I think it makes sense. And it means we as a community of accountants, advisers and entrepreneurs are perfectly placed to make a difference.
So what do solid financial foundations look like? There are 5 big pieces to the puzzle:
- Commercial literacy
- Performance visibility
- Rolling forecasting
- Aligned KPIs & metrics
- Insightful analysis
There’s no right order to these pieces. They’re more virtuously circular than logically linear. And while there’s no doubt being strong in any one of these areas is a positive, building depth in all 5 is what really makes a difference.
It might be helpful here to dig a little deeper into each of these pieces, because there’s more to them than simple slogans.
Think of this as the next step beyond financial literacy. Take a bunch of financial ratios, add a clear understanding of operations, a pinch of lean thinking, a dash of constraint analysis and a touch of scenario analysis. Commercial acumen is about understanding how the business is designed to make money and the levers that can be pulled to improve performance.
If business is a game, it makes sense that everyone on our team knows not only the score, but the stats that explain the game situation. How cohesively are we playing? Which plays are working, which aren’t. Are we in the zone and feeling the flow, or are we gritting our teeth and hanging on.
Traditional annual budgeting is damaging to business. The single-scenario mindset, static numbers and ever-shortening forward view can only entrench company short-sightedness. Rolling forecasting is the solution. A longer forward view underpinned by activity-based assumptions, multiple scenarios and regular reviews encourages a forward-looking culture that scans the horizon for risk and opportunity.
Aligned KPIs and metrics
KPIs and metrics play many roles, but most important are those that translate the forecast into day-to-day and short term targets. The importance of alignment is perhaps best proven by its negative. What if the KPIs and metrics are not aligned in a business. Diligent effort driving in the wrong direction is all too common.
Analysis that gets to the heart of why. Analysis that goes deeper than mild observation, simple ratios and rote responses. Analysis that searches for correlation and locks onto causality. And then compares what happened to what was expected. And then seeks learning from the difference, whether good or bad.
It may not have been as clear at the time, but when I look back, it turns out my entire consulting career was built around this very simple set of principles. And having applied them successfully in businesses from pre-revenue startups through to multi-billion global businesses, it’s clear they work. And they’re universal. And they can help every business.
Like most systems, the quality of the whole foundation is defined by the weakest link. The happy corollary here is that great improvements in the whole can come from small improvements to just one area.
Which brings me to forecasts. And forecasting. And business modelling. And visual reporting. And business drivers. These things have been on my mind for near on 25 years.
In a very practical sense introducing a robust forecasting process into a business is, if done properly, the best way to kickstart and reinforce the solid financial foundations we outlined earlier. I’m not talking here about a slap-together budget, or a press-a-button-and-the-software-does-the-work budget. Those are ‘fun with maths’ exercises only, and a long way removed from forecasting that actually helps a business.
In my experience, the forecast itself should never be the star of the show. Even a well-constructed forecast is simply one set of numbers that tells the story of one possible response to one assumed set of future circumstances. There’s a one-in-a-million chance of it being right. But being perfectly right is not the point. Forecasting is all about preparing for an uncertain future. It’s not about trying to predict a certain one.
The real value of forecasting is not about the numbers at all. No, the real value lies in the process and the scenarios and the assumptions and the discussions and the decisions and the roadmaps and the playbooks.
The learning that comes from engaging fully in this approach and from involving a broad reach of people across the business in this approach, is immense. And the value compounds over time as we strengthen the forecasting muscle. The more we get people talking about the future and options and responses, the more we train their eyes to spot risk and opportunity and the more we train their minds to find ways to improve performance.
I’ll expand on these ideas in the next article, but in closing I come back to my earlier point. As a community of accountants, advisors and entrepreneurs, we’re ideally suited to learning, adopting and sharing these principles. There are obvious service line opportunities for accountants and advisors. And there are also opportunities for all of us to learn, to expand skillsets and build deep expertise in each of these foundation areas.
Let’s do it … the world needs us.