It's an interesting fact that the reason most entrepreneurs and CFOs don't have a financial forecast for their company is the fear that their forecast might be wrong.
In part 1 of this post, I shared that as a longtime CPA and CFO, I understand the almost hardwired concern about being right when it comes to providing financial information (both historical and forecast).
The good news is there are two very powerful ways for you to get past the fear of being wrong when forecasting.
- Start your forecasting process but don't share it with anyone… yet.
- Summarize the results of the forecast at a high level… and use a range.
In this post, I'll talk in more detail about the first way to get past the fear.
Create Your Forecast But Don't Share It… Yet
The single biggest step you can take to overcome the fear of being wrong is to create your first forecast and don't share it with anyone yet. That way you get your forecast process started (which is half the battle in starting anything new). And you eliminate any criticism if it isn't perfect because no one will even see it at this point.
Don't be fooled if that prescription sounds overly simplistic.
It's a common sense, logical method that I have used with great success over the years. It overcomes our natural tendency toward inertia when starting something new. And it eliminates the fear of being wrong.
For Your Eyes Only
Basically, you are going to start by creating the forecast "for your eyes only". Not forever, just at the very beginning to get the forecast process started.
So that means:
- Don't try to sell the CEO or the leadership team on the value of having a forecast
- Don't talk to them about the assumptions or specifics as you create the forecast
- Don't send the results of the forecast to them
You can skip those parts of the process initially and get right to creating your first forecast. As you get started, keep these principles in mind:
- Keep the forecast high level (it's a top down rather than a bottom up process). You should have the forecast completed within one week of starting it.
- Forecast each of the next six months (an income statement, balance sheet and statement of cash flows). Six months is a short enough period to keep the process fairly simple.
- Use forecast software (if you start with a homegrown spreadsheet you will end up trying to use it going forward). The problem with spreadsheets is they become way too clunky and difficult to maintain. And the forecasting process dies as a result.
The beauty of getting started on your first "for your eyes only" forecast is you get to taste the benefits of financial forecasting without worrying at all about what others might think or if your numbers might be "wrong".
You are giving yourself permission to learn and experiment at this beginning stage.
You Get the Benefits
Even without sharing the forecast results initially, you still get to experience the benefits of the financial forecasting process. The benefits are you get to:
- Become intimately familiar with the strategy and direction of the company
- Identify the key drivers of financial performance
- Reduce the risk of error in the historical financial statements
- Compare actuals to forecast each month to learn what parts of your forecasting process are working well and which need some work or fine tuning
- Create insights about past and future financial performance
- Think through ways to simplify the forecast process
- Consider the best way to present the forecast when the time is right so that it is easy-to-understand
After running the forecast process for three months, you will become much more confident and knowledgeable about the benefits and the approach. You will know firsthand where the landmines are that you need to avoid. You will have a better sense of the kinds of strategic and monthly decisions that the forecast can influence and help improve.
Getting Started is Fun… and Rewarding
This approach puts you in a powerful position. It sets the stage for you to enhance your personal influence and credibility in the company.
I encourage you to start the financial forecasting process now… "for your eyes only".
It's a simple step that will pay big dividends for you and for your leadership team.
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