The question isn't whether your financial forecast is wrong. It's whether your forecast is reliable.
I led a webinar recently for financial professionals on using financial forecasts to drive profitability and cash flow. During the session I asked this question of the participants:
"If you do not routinely provide a financial forecast, what's the primary reason for not providing one?
57% said they were concerned about providing a forecast that wasn't accurate.
As a longtime CPA and CFO, I understand the almost hardwired concern about being right when it comes to financial information.
David Axson wrote a fantastic book Best Practices in Planning and Performance Management: From Data to Decisions. Here are a series of quotes that really hone in on this very common obstacle to forecasting:
"In 1922 Thomas Edison predicted that "the radio craze… will die out in time." Of course he was wrong; most forecasts are.
When asked to construct a forecast, the fact that most are wrong is perhaps the hardest concept for most people to come to terms with. Everything we have been taught conditions us to believe that right answers are good and wrong answers are bad, yet when faced with developing a forecast, the odds are stacked against us.
Getting over the fear of being wrong is the first step toward developing a best practice forecasting process."
One thing you know when creating a forecast… it's not going to come in exactly as you forecast it. The good news is the objective is not so much about accuracy as it is about reliability.
A reliable forecast is about helping you make better and faster decisions that can help you drive profitability and cash flow higher. It requires that you think strategically about how you present both the objectives of the forecast and the results.
Here is another quote from David Axson:
"First and foremost, the process of forecasting can be an invaluable aid to making decisions. As Peter Schwartz comments in his discussion of scenario planning, The Art of the Long View, "The end result… is not an accurate picture of tomorrow, but better decisions about the future."
Many companies fail to understand this crucial insight. The real value of a forecast is not the accuracy of the answer but the insights into how current decisions and future events interact to shape performance.
The forecasting process serves as a vehicle to increase management's confidence in the decisions it makes by taking a rational view of the most likely future outcomes based on currently available information."
In forecasting, you want to think decision-making, not precision.
The good news is there's a solution.
I'll share a surprisingly simple approach in my next post.
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