Budgeting and forecasting: why it’s so important to strategic planning
While mature businesses often have a better handle on forecasts than younger, higher-growth businesses, forecasting growth scenarios can be tricky.
After all, there’s no single right way to do it.
If you’re fortunate enough to work on long projects that build a backlog, then forecasting revenue is less of an art and more science. Businesses with more variables, however, can lead to inaccurate predictions, which is why using multiple forecasts is helpful.
Typically, when I do forecasts with clients in young, high-growth businesses, I take their most conservative estimate, slash it by 30-50% and build a budget based on this figure.
Of course, this isn’t a one-size-fits-all approach. But being unemotional about the issue allows me to take their best estimate, apply my own logic and theory to the equation, and dial back the forecast to something that’s more likely.
A conservative approach is always key. You’re better off advertising for open positions than laying off workers you can’t afford. When your executive team meeting is always centered around cost cutting, then you’ve made a key strategic error.
Reviewing year-to-date financials that show better-than-projected performance allows you to think about strategic positioning for the future, since you’re not panicking over cutting costs or putting out fires.
In that sense, a conservative forecast is one of the most important components of an effective strategic management strategy and team.
