How to build a reliable forecasting process

Building a reliable profit and cash-flow forecasting process is often a time-consuming and challenging task for a growth company. You can make it a lot easier by taking into account certain things that we’ll cover in this post.

If comprehensive forecasting is a new process for your company, start by extracting recurring transactions from your accounting system for the forecast. This gives you a solid foundations, and recurring transactions are easy to adjust when prices change or contracts end.  On the expense side, recurring transactions typically include salaries, rent, insurance, interest, loan repayments, etc. On the revenue side, they include SaaS revenue and other recurring “subscription" based income.

Use your management reporting P&L as a base for your forecast table. This allows you to link forecasts to the P&L report, creating a gar more comprehensive tool for monitoring your business. At the same time, you get actuals through accounting, simplifying the monthly forecasting process and minimizing the manual work involved in tracking forecasts vs. actuals.

Forecasting new sales can easily become too optimistic, creating cash flow headaches if expenses rely on those numbers

Make forecasting a regular process and integrate it into your month-end closing process. Significant changes can be updated more frequently, but a full review and update of forecasts should be done once actuals are available. If the actuals include events that were forecasted for future months, remove them from the forecast. Conversely, if an event forecasted for the reporting month did not occur, move it forward in the forecast. If new recurring items are found in the actuals that were missing from the forecast, update them accordingly. This keeps your forecasts effectively up to date.

New sales forecasts tend to be overly optimistic, which can lead to unexpected cash flow problems, especially if expenses blindly rely on the forecasted revenue. Salespeople are often very confident in their abilities – which is a good thing, don’t get me wrong – but this can result in hopeful but inaccurate estimates. When forecasting new sales, realistically account for the time it takes to sign a contract and how soon revenue can be recognized after the customer is onboarded.

Continuous and careful monitoring of forecast accuracy is a critical part of the forecasting process. For sales forecasts in particular, create a table (example below) to track how forecasts evolve over time.

Develop key performance indicators for forecast accuracy and set targets for them. Integrate their tracking into management reporting and board materials. This helps ensure your forecasts stay on track.