Having worked with countless founders, developers and investors on building financial forecasts, I have encountered a few themes around (what I see as) misconceptions. Forecasting is seen as a dark art and this has been down, in part, to some common myths that we have encountered when we speak to business owners and founders. Below is my top 5 myths that we hear from our customers.
Myth #1 – You need to be an accountant
Some financial knowledge is helpful and will enable you to interpret your financial forecasts quicker but accountants do not always make good financial modellers. Much of financial modelling is in the structuring and design of the forecasts to make them clear, consistent and able to drive decisions making. I know great financial modellers who have no background at all in finance but have learnt from building models. So on to Excel – we love Excel, it is the incumbent software and is a very powerful tool – no doubt, having some foundation in it will assist you to build the formula needed for a dynamic model but we will show you that even the most basic o Excel skills can build a model. There are also means outside of Excel to build you financial model, in fact this is where we can shameless plug numberslides, our forecasting platform that we have built to enable users to build bullet proof financial models with no spreadsheets whatsoever! We have created numberslides to demystify financial forecasts.
Myth #2 – You need historical data and lots of it
Historic data is one way to build the foundations of you model. If you have the data available then this is your starting point and it should form the basis of your forward looking projections but if you do not have any historic data or enough to see any trends then you can still build a robust financial model. In this case, you work from the bottom up, looking at the core drivers and building scenarios that allow you to flex and test business cases until you land on a scenario that you are comfortable with and is deliverable.
Myth #3 – It’s all finger in the air
To a certain extent this is true but the finger in the air is supported by well thought out assumptions and business logic. We do not know what will happen next year, let alone in 5 years’ time but we are showing scenarios of what may happen and providing this backed by sound logic and is achievable then this goes a long way. We see it like your old maths exams when you were given marks for showing your workings. This also brings up accuracy and how accurate your forecasts need to be…
Yes, your model has to be accurate or at least have sound basis that backs your assumptions but no, you do not need to be as accurate as possible as how can you be? We are building forecasts that your audience need to buy into – now expectations may be different between an infrastructure investor and a business angel but the forecast is another tool to sell your vision.
Myth #4 – The more complex the better
This is not true – we want your audience to be able to make a decision based on your forecasts. This means that they need to understand it and in some cases test your inputs. We see it as a balance that fits around what your audience want to see. You want you forecasts to give confidence you have a handle on your numbers not that you are an Excel wizard. So something scribbled on a paper napkin is probably not detailed enough but endless spreadsheets linking to spreadsheets with rows and rows of inputs (but in some complicated business models that may be needed) is going to delay decisions being made.
Myth #5 – Once you have your forecast, you’re done
This is a big no no – like any good business plan, your forecasts need to be reviewed on a regular basis. Things change, business pivot – this could be market pricing, government policy or you lose your first mover advantage – things outside your control will mean you need to review your inputs and make sure they still reflect your situation. Also, if you are fundraising, a key aspect of this journey is investor feedback from the one’s who passed – constructive feedback may lead you to change your business model, pricing or cost base – so keeping your forecasts fresh and up to date will set you up for success.