how cfos turn historical numbers into insight and...

Financial ForecastingHow CFOs Turn Historical Numbers into Insight and Action

Making History… not just recording it!

Your New CFO Super Power

© 2017 Philip Campbell

© 2017 Philip Campbell

“We are all forecasters. When we think about changing jobs, getting married, buying a home, making an investment, launching a product, or retiring, we decide based on how we expect the future will unfold. These expectations are forecasts.”

- Philip E. Tetlock and Dan Gardner,SuperForecasting

© 2017 Philip Campbell

A Forecast is Not a Target

“Some would call ‘on course to hit a rock’ a bad forecast. Assuming it is true, it is a goodforecast, even though it contains bad news.”

“I would much rather have good forecasts with bad news than a bad forecast with good news.”

- Bjarte Bogsnes, Implementing Beyond Budgeting

© 2017 Philip Campbell

Key Words/Concepts for the Day

• Reliable financial forecast• This is about YOU… and win-win• Growth sucks cash• 10 rules… and a recipe• Making history, not just recording it

http://financialrhythm.com/library/

© 2017 Philip Campbell

A Reliable Financial Forecast

Reliable – Based on expected financial results and designed for decision-making.

Financial Forecast - A full set of forward-looking financial statements that includes a 2-minute summary.

Insight = aha moments

Action = change the future

© 2017 Philip Campbell

“Growth sucks cash – the first law of entrepreneurial gravity.

Yet many growth company leaders pay more attention to revenue and profit than they do to cash when it comes to structuring deals with suppliers, customers, employees (think bonus plans), or investors/banks.”

Verne Harnish, Scaling Up

© 2017 Philip Campbell

Rapid Growth Example

• Monthly revenues of $1 million and pre-tax profit of $100k

• Double revenues in month two and double them again in month three

• What happens to profit and cash?

© 2017 Philip Campbell

The Change For the Three Months

• Revenue goes up $4 million• Pre-tax income goes up $1.1 million• Cash goes DOWN by $500k

1. It’s all about decision making, not precision2. Think top-down, not bottom-up3. Model a full set of financial statements4. First look back, then look forward5. Understand the high-level company strategy and

expectations6. Simplify, simplify, simplify7. Create a repeatable process8. Be conservative9. Condense the results to a 2-minute summary10.Start for your eyes only

10 Rules for Creating a Forecast You Can Trust

© 2017 Philip Campbell

© 2017 Philip Campbell

Think Top-Down, Not Bottom-Up

Question: How many people will you have to rely on to provide you with accurate estimates for your forecast?

© 2017 Philip Campbell

First Look Back, Then Look Forward

No Blank Slates!

© 2017 Philip Campbell

Create a Repeatable Process

Target

Monitor

Adjust Target

Monitor

Adjust Target

Monitor

Adjust

Month 1 Month 2 Month 3…

© 2017 Philip Campbell

Condense the results

to a 2-minute summary

© 2017 Philip Campbell

The Recipe for Financial Forecasting

Plan

•Set the objectives•Decide on the

historical & future periods to present• Identify the key

drivers (financial and nonfinancial)

Create

•Gather financial & nonfinancial data•Discuss where the

business is going•Create the forecast

Present

•Create a 2-minute summary•Show historical &

forecast results side by side•Make the forecast a

part of your Monthly Financial Rhythm

© 2017 Philip Campbell

Decide on Historical and Future Periods

1. Historical results for the last few years by month

2. 6 to 18 months of forecast by month3. Rolling forecast updated monthly (with

certain exceptions)

© 2017 Philip Campbell

© 2017 Philip Campbell

What two numbers can you multiply together to get revenues? (emphasis on nonfinancial)

1. Number of customers × average ticket 2. Hours incurred × average billing rate 3. Gallons × average selling price

© 2017 Philip Campbell

© 2017 Philip Campbell

Example: ABC Construction Company

• CEO/Owner plans to recruit respected and experienced business people for his Board

• Wants people who have “been there and done that”

• Forecast will help the Board create and monitor the growth plan

© 2017 Philip Campbell

© 2017 Philip Campbell

Set the Objectives (In Writing)

1. Implement a reliable forecasting process to help evaluate various growth plans and strategies

2. Incorporate the forecast into the monthly reporting process for the Board

© 2017 Philip Campbell

© 2017 Philip Campbell

© 2017 Philip Campbell

© 2017 Philip Campbell

The 2-Minute Summary

• <from the example)

The 2-Minute SummaryMemo to The CEO

We have completed the financial forecast that covers the next 18 months of results. Taxable income is expected to be $1.5 to $1.7 million in the current year and $2.2 to $2.5 million for next year. While profitability is generally aligned with our strategic plan going into the year, there are two important insights that we need to discuss. Each one is influenced by our plans to win projects with a number of new, and very large, customers over the next six months.

© 2017 Philip Campbell

© 2017 Philip Campbell

The Next Level of Detail

We have adjusted the distributions to owners from $100,000 per month down to zero beginning in August. We restart the owner distributions in the forecast in March and assume a larger distribution in December of next year.

We assume that the previous plan to begin aggressively paying down debt is put on hold until July of next year. The assumption is we will pay debt down to zero by December of next year.

The negative assumptions about owner distributions and debt are driven by the temporary cash shortfall created by the new customers. The new customers are large and we have not done business with them in the past. Our experience with large customers has been that they take longer to pay than our traditional customers. And the problem is usually more pronounced in the early months of a project. As a result, we have increased the DSO assumption and assumed that we will be paid slower than normal between October and April.

© 2017 Philip Campbell

Get Out of the General Ledger!

© 2017 Philip Campbell

The Benefits for YOU

• Makes work more fun and enjoyable• Makes you more valuable• Reduces the risk of error in your

financial statements

© 2017 Philip Campbell

Questions?Yes… Buts?

© 2017 Philip Campbell

© 2017 Philip Campbell

Your Next Step

1. List three benefits for YOU2. Take a baby step with revenue3. Start for your eyes only

© 2017 Philip Campbell

© 2017 Philip Campbell

Downloads and Contact Information

• www.ILoveForecasting.com• financialrhythm.com/fortworthcpa/• Philip Campbell

– 512.944.3520– pcampbell@pdq.net

© 2017 Philip Campbell

© 2017 Philip Campbell

Spreadsheets vs Forecasting Software

• Benefits/Downsides of spreadsheets• Benefits/Downsides of forecasting

software

© 2017 Philip Campbell

Types of Forecast and Different Uses

• What’s about to happen?• What could happen?• What would we like to see happen?

© 2017 Philip Campbell

The Difference

• Budget• Forecast• Projection