I was just reading some comments on Linkedin about the failings of the forecasting process. Some managers were obviously frustrated at the requirements their businesses were putting on them.
I think it’s helpful to break forecasting down into three distinct activities:
1. – Short term cashflow. This is the 13 week rolling forecast with a detailed analysis of expected movements on the bank account.
2. – Medium term – out to 18 months. This will start with the annual budget and then be periodically updated as new facts become known about the key drivers. This will help determine the operational strategy for each part of the business.
3. – Long term – out to 3, 5, 7 years. This can be the internal strategic plan or a business plan to be presented to a potential funder. It is the longer-term roadmap for the business and will be determined by the senior management.
The trick is to identify the appropriate tool for each activity. Perhaps the accounting package can handle 1., a budgeting / forecasting application for 2. and a driver-driven spreadsheet does 3.
One thing, however, is crucial. For each of the above you need to have historical figures against which you can compare the forecast. This puts the forecast outcomes into context and allows you to perform an ongoing “health check” on the numbers.
