I love the Waze app on my phone.
What I like about Waze, is that it’s more than just a GPS app– it is like a mini-copilot. It tells you when there is debris on the road ahead, where the police are, and how long you’ll be sitting in traffic. I use it all the time, even when I know where I am going because it will always tell me the exact time I am getting to my destination, no matter how fast I’m going over the speed limit. (How does it do that?? !!)
What I like the most about Waze, however, is the fact that it looks ahead on your route and will change directions if traffic develops ahead… all this done in mid-drive.
Any good GPS will allow you to take detours on your route, guide you when you have made a wrong turn– ultimately getting you to your destination. But there is something more comforting when you know what’s coming and can have an alternate route planned for you.
Don’t you wish businesses came with their own GPS? Something that would tell you when there were hazards ahead, redirect you and plan alternate routes to get to your destination?
You can. It’s called dynamic forecasting.
Similar to a GPS, a good forecasting process–and I mean process— will help you navigate through the year. Unlike a budget that you set at the beginning of the year and remains unchanged, a good forecast takes into consideration what’s currently happening in your business. It’s a working model of how your year is going to end.
Here are the basics: Forecasting typically means forecasting your Profit and Loss Statement, from Sales down through Net Income. It should be done monthly and you should have a support behind your numbers. You should share this forecast with your accountant so they can help you in tax planning and adjusting your estimated tax payments. Sometimes forecasting is the owner’s job, most of the time it is a collaborative effort of the entire leadership team.
The forecast is valuable, but the forecasting process is gold.
If you are re-forecasting your year each month, and comparing your performance against your forecast, you are gaining tremendous insights into how your business functions. Here are the steps for creating a good forecast.
Step 1: Compare your actuals to your forecast. This simple step is often overlooked in everyone’s zeal to put the current month behind them and look ahead. In addition to comparing your actuals to your budget you also need to compare them to your forecast. Otherwise you’ll never get any learnings from it.
Step 2: Become a better crystal ball reader: When you forecast regularly, you’ll get better at it. In this step you want to refine how you develop your forecasts, learning how to gather reliable data and get more realistic in your expectations.
Step 3: Identify core issues: If you are getting better at forecasting and you are still missing your numbers, it’s time to look in-house to see where the underlying issues are. If, for example, your sales forecast is reasonable, but you missed it significantly, you need to understand why. Did your sales people not close the deals timely? Did clients balk on price? Did your competitor win the business you thought was a slam-dunk?
Step 4: Redirection: Just like knowing there are road hazards ahead, so too knowing what lies ahead in your business can help you avoid trouble. So even if your budget looks like a pipe dream mid-year, you may be able to salvage some of it. Forecasting should be an exercise in scenarios– whether you put those scenarios on paper or just talk through them, having a plan A and plan B is never a bad plan at all.
In short, there IS a GPS for business… it’s called monthly forecasting. Anyone can slap a few numbers on a spreadsheet, check the “I did my forecast” box and move on. But the real value, and the real learnings come from the process of forecasting: understanding not only how the numbers play out vs your predictions, but how well you did predicting this in the first place.
What’s your method for forecasting in your business?