Why reliable forecasting is crucial for growth companies

A growth company aims for growth by taking on risks. Especially companies backed by VC investments tend to spend somewhat excessively before revenue flows in from customers. This significantly increases business risks and makes reliable forecasting essential, which in turn adds to the pressure of an already chronically busy growth entrepreneur.

Without effective forecasting, a company has no reliable view of its future, and a sudden cash crisis could – in the worst case – threaten the company’s very existence. Every entrepreneur, despite their hectic schedules, should find time to develop forecasting. For growth entrepreneurs, forecasting is particularly crucial: as a rule of thumb, the higher the risk taken to pursue growth, the more important forecasting becomes.

The higher the risk taken to pursue growth, the more critical forecasting becomes

Profit forecasting is typically presented in management reports and board materials as a P/L forecast. In it, the forecast is combined with year-to-date (YTD) results and compared to the budget, the previous 12 months (LTM), or the prior fiscal year. It can also be shown as a rolling 12-month forecast and be compared to both LTM and the current year’s forecast. This provides a view beyond the current fiscal year through monthly tracking. A rolling 12-month forecast also serves as a solid foundation for budgeting.

Even more important than profit forecasting for many growth companies is cash-flow forecasting. A rolling 12-month cash-flow forecast, visualized as in the example below, gives the management  and the board a clear picture of how long the company’s cash will last and the potential size of any financing need.

However, forecasting tends to be tricky – especially for those without prior experience in it. A common mistake in the forecasting process itself is making it too complex by striving to forecast at a much too detailed level. Another typical issue is making the updating of forecast too difficult by e.g. using a cumbersome forecasting tool. Sales forecasting, on the other hand, often slips on the overly-optimistic side.

The biggest mistake you can make when forecasting is not actively following, monitoring and analyzing forecast development. Click to the next post for tips on how to not only develop your forecasting process, but also how to monitor and analyze it.