completion dates and costs? Will a specific customer be able
to pay its invoice by the due date?) The answers to these
questions along with a host of other details will all impact
the precision of your estimate of pre-tax income and cash
available for debt reduction.
But what is very clear in the forecast is that there is a substantial risk of missing the pre-tax income and debt reduction
targets for the year. Based on the forecast, management’s
attention is required to get the company back on track for the
second half of the year.
Chasing precision will only serve to cloud the message and
distract from the importance of getting the company back on
track to meeting its financial goals.
As you create and use forecasts, think decision-making, not
FORECASTING RULE NO. 2: THE NEAR FUTURE ALMOST
ALWAYS LOOKS LIKE THE RECENT PAST
One of the biggest mistakes CFMs make in creating a forecast
is to start with a clean slate – a blank spreadsheet to begin
thinking about what the first month in the forecast will look
like. The first step should be to drop in actual results for the
past 6-12 months. Have the revenues and expenses been coming as expected? Can you see a trend developing? Are you
surprised by any of the numbers now that you are looking at
the past six months of actual results next to each other?
In order to increase the reliability of the forecast, the historical facts and trends and the company’s goals and financial
targets must be considered together when you create the
FORECASTING RULE NO. 3: CONSIDER WHAT IS CHANGING
Once you have a good view of what the financial results have
been over the past 6-12 months, look at some of the factors
that can make the next 6-12 months vary from the historical
results. The WIP schedule is a great source of information
(e.g., what revenues and cost of sales you can expect over
the next few months).
Then, consider the types of outstanding bids. Are they
targeted at construction projects similar to those in the
past? Are they for smaller or larger projects? Are the gross
margins consistent with current projects, or are they higher
Think through how the business is changing and its likely
impact on financial results and cash flow. Talk to PMs and
others about what they are seeing in the market. Does
customer activity seem to be picking up or slowing down?
Management and others inside the company are a wealth
of information that will shed light on what’s changing and
what’s about to happen.
FORECASTING RULE NO. 4: BE CONSERVATIVE
Because we know the forecast will not be perfectly accurate,
the challenge is keeping it in the “ballpark” since a wildly
inaccurate forecast will hurt your credibility. Therefore, be
conservative in your key assumptions.
Let’s say you are working on the profitability component of
your forecast. Last year, the company generated $6.5 million
of net income. This year, profits could reach $10 million if
results continue the way they have been going. Being conservative in your forecast of profitability means that you assume
there could be some slips or slow downs before year-end. So,
your forecast might guide the profit estimate down to around
$9 million, which provides some room for error or surprise. It
recognizes that not every “at bat” results in a home run.
While your estimates will not be perfect, err on the side
of being conservative. That way the surprises are pleasant
rather than unpleasant.
PROVIDING INSIGHT TO YOUR LEADERSHIP TEAM
HELPS YOU BECOME PART OF MAKING HISTORY
RATHER THAN JUST RECORDING IT.