In my role as a coach I work with CEOs and their leadership teams to help them put systems in place so they are capable of confidently predicting the future growth and profitability of their business.
One of the key things we do as part of this process is produce a 3 year financial forecast. This is a great way of looking at future sales, profitability and cashflow. However, this only works if you get the input of the entire leadership team and not just the finance function.
When I first tell clients we are going to do this they are often intimidated and believe that it is going to be a tortuous process. In my experience companies are pretty good at budgeting for the next 12 months. The only problem with this is that a budget is often set in stone and if you are either well ahead of your budgeted sales and profitability or well behind it quickly becomes irrelevant.
In my former car dealership business we had multiple different franchises and each franchise location was responsible for working with the financial controller to produce a budget that was then presented to the board for approval. If the board felt that the budget was too low it was sent back for review. However a lot of the time these budgets were a best guess and driven by the finance team and not by the people who were responsible for selling the vehicles, parts and services that produced the company’s revenue. The whole budgeting process was demotivating for the wider team and in particular the department managers, who were tasked with delivering the budgeted results. Even worse was the fact that many people were paid on results versus budget so this lead to a lot of gamesmanship and lowballing of numbers to try and get a softer target.
Once we switched away from budgets and started to focus more on forecasting with numbers that were generated by the whole leadership team, and not just the finance part of that team, there was a complete transformation. Instead of a budget which was set and could not be changed until the end of the fiscal year we had a forecast that was a dynamic tool for helping the leadership of the company to make decisions quickly. It also moved us away from a culture of having to spend money because it was in the budget to one where we could easily see the areas of the business that were growing and required more cash to fuel this growth versus areas of the business that did not need as much cash.
I use this 3 year forecast tool today in my own real estate business so I can make sure that we are adequately funded for our development projects during the planning and building phases and we are not trying to do too much at the same time, thus putting the company under pressure, either from a cash or human resources point of view.
If you have not tried to produce a 3 year forecast for your business I highly recommend you give it a try. It can help you to decide where you focus your energy and resources in order to weather the storm and emerge stronger and more resilient on the other side of any downturn.
Please reach out to me directly for help if you’re interested in getting started on producing a 3 year forecast for your company. Or if you’re interested in how this could form part of an overall strategic plan for your company’s future do not hesitate to message me.
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