Introduction: The Uncertainty Opportunity
At the beginning of the year, you likely had a clear operating plan and budget approved by executives and the board, forming the foundation of your 2023 strategy. Then, the world changed. For many, plans became irrelevant as the underlying assumptions and inputs underwent significant shifts.
We cannot control macro-economic shifts, but we can control our response. Despite operating in a volatile and uncertain environment, exceptional companies not only survive but thrive amidst adversity. This is what we call the Uncertainty Opportunity. Beyond foundational capabilities like strong leadership and great products, we believe our companies thrive while others falter because they’ve cultivated a strong strategic forecasting muscle.
Tom Sweet, CFO at Dell, echoes the importance of forecasting: “Accurate forecasting in the technology sector is a strategic advantage that enables efficient resource allocation, risk management, and the pursuit of opportunities.”
This article serves as a framework to guide you through the Uncertainty Opportunity by building and improving your strategic forecasting capabilities.
We will explore three essential concepts:
- The reliance of Category Leaders on real-time forecasting.
- How to identify imminent risks and opportunities and rapidly address them.
- Best practices for implementing effective forecasting within your organization.
Let’s dive in.
Why Category Leaders Use Forecasting as an Alignment Tool
In times of economic volatility, the speed of information separates winners and losers. Category Leaders understand this truth and use forecasting as a critical alignment tool, allowing them to make more effective decisions, at every level of their organization, faster and based on current information vs yesterday’s assumptions.
“While the numbers in a forecast are important, they aren’t the most important thing. The most important outcome of forecasting is achieving alignment.“Adriana Carpenter | CFO, Emburse
There are 3 primary reasons why category leaders use forecasting as a foundational operational process to drive decision-making.
- Alignment. As Jim Collins famously said, “Building a visionary company is one percent vision and 99 percent alignment.“ Forecasting is a way to drive alignment, especially at the executive level, which then ripples throughout the organization.
- Prioritization. No matter the size or strength of your company, you will always need to make choices and trade-offs. Forecasting is a way of bringing critical choices to the surface and driving smart decisions and clear priorities.
- Operational rigor. As companies grow, there’s a tendency for chaos to root. This creates long-term risks to the business as decisions are made haphazardly and critical metrics go unmonitored. Forecasting serves as an operational touchstone to stay up to date on critical metrics as the macro and micro environments move.
What We’re Seeing – Risks and Opportunities
Data is only valuable when it directly applies to your unique situation. This is why Category Leaders are such strong proponents of regular forecasting. It helps them move away from generalities, assumptions, and hopes, and make decisions firmly grounded in their reality.
With that in mind, it’s important to note that the trends mentioned below may or may not be relevant to your specific business, industry, or situation. It’s crucial to critically assess your own business and identify risks and opportunities that are specific to you.
We’re seeing 5 core risks across our portfolio companies.
- Slowing bookings (in some sectors). In some sectors, like technology for example, decisions are taking longer to make and companies are more risk averse. However, in other sectors like healthcare, we haven’t yet seen a significant shift in bookings volume or velocity following the changes caused by COVID.
- Larger buying committees. More people are now involved in all buying decisions.
- Usage scrutiny. Customers are evaluating tools to understand widespread usage and to identify any decline from previously committed levels.
- Must-have scrutiny. Customers are not only scrutinizing tools based on usage but also considering their impact.
- Reduced access to capital. Capital is no longer a commodity. Fundraising now requires proactive and strategic efforts.
While volatility brings risks, we’re also seeing many opportunities. While we must be mindful of the risks, we work to focus on the opportunities.
- Greater reliance on existing vendors. Category Leaders often offer a variety of products and services to their customers. As companies seek solutions or efficiencies, they turn to existing vendors to find answers rather than seeking net new. There is an opportunity to double down with existing customers to drive 10X value.
- Abundance of talent. There’s an opportunity to acquire Tier 1 talent and topgrade existing talent. If you plan on being in business in 5 years, then you want the best possible people on board. There is an opportunity to invest today to build the best crew for tomorrow.
- Acquisitions. Many companies are facing reduced valuations and are having difficulty accessing capital. This creates an opportunity for would-be Category Leaders to purchase complementary product add-ons or look for Acqui-hires to reinforce their position.
- Return to in-person work. At K1 we’re huge proponents of working together in the office. Our 130+ person staff works from our Manhattan Beach offices 5 days a week to facilitate the collaboration, communication, immediate feedback, increased creativity, and other benefits that come from being together. We recognize that in-person work may not be part of the culture of every company. That said, if it is, or you’d like it to be, many people are more amenable to in-person work in the current climate, and it’s an opportunity to build that muscle at your company.
Take the time to identify your risks and opportunities. How do these risks and opportunities impact your business? Have you identified other risks that may affect your particular business? Take 15 minutes of your next Executive Leadership Team meeting to discuss.
Forecasting Best Practices
By now we’ve hopefully convinced you that forecasting is a critical practice and one of the most valuable tools at your disposal to drive success.
Next, let’s delve into a few best practices gleaned from top CFOs and executive teams at our portfolio companies. We’ll begin by defining the type of forecasting that our CFOs recommend: Rolling Forecasting.
Rolling forecasting is a flexible financial planning and budgeting approach that continually updates future projections based on new information and changing business conditions, usually forecasting a period of 12 to 18 months. Unlike a traditional calendar or fiscal year forecast, rolling forecasts provide a more dynamic and agile way for companies to plan, adapt, and make decisions based on the latest data and market trends.
Our CFOs advocate 5 best practices to help you sharpen your strategy using Rolling Forecasting:
- Prioritize cash forecasting above all else. Developing expertise in forecasting cash is paramount. Even if your company is thriving with growing ARR, running out of cash can lead to disaster. In your weekly forecast, provide a detailed breakdown of sources and uses of cash, extending over a 13-week period.
- Forecast income and balance sheet monthly. Perform a comprehensive reconciliation of both the income statement and balance sheet monthly, and review them regularly with the entire executive team. This facilitates a thorough understanding of the financial standing of the company.
- Revisit assumptions regularly. In a volatile environment, every assumption should be questioned. Scrutinize budgets and forecasts in light of new information and pressure-test the underlying assumptions. A stellar Q1 performance doesn’t guarantee the continued validity of those assumptions or justify excessive spending. Take the time to review and validate your assumptions.
- Involve all executive team members. Forecasting is too important to be treated as a siloed finance practice-it’s a company issue. Budget owners must be responsible for working with finance to update and vet forecasts. A good sign of a failed budget or forecast process is everyone pointing at the CFO when the company misses its targets. Budget owners need to own their numbers.
- Implement zero-based budgeting. Next year, with all results accounted for, tear down your assumptions and start from scratch with zero-based budgeting-a method of budgeting in which all expenses must be justified for each new period. It will encourage greater accountability, transparency, and provide a wonderful foundation as investments will be evaluated based on their strategic importance and impact.
“Forecasting is a muscle. Like any muscle, to improve overall strength and stamina, it needs to be flexed and worked repeatedly. When done properly, overall health improves exponentially.“Mike Cagle | Chief Financial Officer, Smarsh
Overcoming Internal Objections
One of the common objections you’ll face when implementing your forecasting practice is “but we don’t have time for this.“
With practice, forecasting becomes seamless. Your first time, the practice may feel cumbersome. After a few repetitions, with models established, it will take only an hour or two of work-FP&A tools like Jedox will make it even faster.
The single most common response we hear from teams after implementing a forecasting practice is “I don’t know how we ever operated without this.“
Build the forecasting muscle, watch your company grow