There is a difference between a goal (financial target) and a reliable financial forecast.
In the book Implementing Beyond Budgeting: Unlocking the Performance Potential, Bjarte Bogsnes does a beautiful job of clarifying what a forecast is… and what it is not.
"Some would call 'on course to hit a rock' a bad forecast. Assuming it is true, it is a good forecast, even though it contains bad news."
"I would much rather have good forecasts with bad news than a bad forecast with good news."
Reality Should Drive Decisions
A reliable financial forecast should be designed to help you confront reality… not paint an overly rosy picture of what you wish would happen.
Yes, the process of financial forecasting can be used to help you explore options and possibilities for the future. The process can be used to help you set goals and plan for the future.
But the financial forecast you prepare each month, or receive from your CFO, should be a reality based, honest assessment of what is likely to happen over the next few months… regardless of what your financial goals or targets are.
I learned early in my career that one of the biggest problems a CEO faces is the almost hardwired tendency of the people that work for them to tell them what you want to hear…. not what's really going on.
And CFOs and accountants seem to be hardwired in that way more than most.
The Two Financial Questions
I wrote in my last blog post that anyone running a business (small or large) needs to answer two financial questions at the end of every month:
- What happened (last month)?
- What's about to happen (over the next few months)?
Question number two is the most important.
Remember, a reliable financial forecast should be a reality based view of what is about to happen financially.
That's the secret sauce for helping your management team make better, smarter business decisions that will help you drive growth, profitability, and cash flow higher in your business.
Go for it!