Forecasting

Forecasting!!!!  One of the most dreaded things to do, especially for a start-up executive/founder.  If you are in a senior level position (or aspire to be) I can guarantee you at some point in your career you will have to deal with a forecast.  In starting up a company you are likely to run across a couple of forecasting scenarios.  The first is the fund raising forecast (usually a 3-5 year plan) which you will likely have to do several times but hopefully not too many if you want to still own something when you finally exit.  The second is when you have revenue and have to develop a “real” revenue forecast that will be marked against monthly or quarterly and will likely have comp plans tied to the performance of it.  There are several more forecasting scenarios in between but I will focus on the two noted above.

Fund Raising Forecast:

When you have to put together a 3-5 year forecast for your initial fund raising it can be a pretty overwhelming task due to the amount of unknowns in the model drivers (especially if you are going after a new and unchartered market).  They key to developing this initial forecast is to realize that almost no one will believe it!  You unfortunately have to go through the exercise and not taking it seriously will almost always guarantee that you wont get funded.  The main things that should come out of the exercise are the following:    

• You did your homework and understand the market very well.
• There is a big market opportunity.
• You understand your competition and how you will differentiate yourself from them and potentially defend that differentiation (patents, etc.).
• You have the team or understand who you will need on the team to execute the plan.
• The model will give you a baseline into the key performance indicators in your business.  This is important, as you need to think through your KPI’s very early in the game to make sure you not only can report on them but also have the hooks in place to capture the data.  This is a critical point and will likely be a blog post later on.  Failure to do so will make managing the business very challenging, as you will be driving blind without the data.

Operating Forecast:

Putting together on operating plan is often a lot more exciting than the fund raising plan.  Primarily due to the fact that you have more data points and experience to draw off of as well as incentive comp plans usually get tied to such plans!  Also, you typically draw in more of the organization, which can become a unifying event as an organization.  However, the consequence of missing an operating plan is far greater than missing a fund raising plan.  In a traditional venture round as mentioned above they typically aren’t investing in the numbers you provide but are instead investing in the opportunity and more importantly the team.  Missing the plan is often expected and in doing so usually won’t result in having to give the money back.  However, missing an operating plan will result in lost compensation and can even result in losing your job.  So it’s very important to be very thorough in coming up with an operating plan. 

There are a lot of ways to skin this cat but some key things that I would like to leave you with are as follows: 

• Have someone good at Excel close by!  I have been involved with zero revenue companies as well as companies doing almost a billion in annual revenue and no matter how big they are or how sophisticated their accounting systems are, the forecasts almost always end up being done in Excel.
• Take time to thoroughly think through the architecture of your Excel model.  Most people just dive into the model exercise without giving much thought to the architecture of the model or how it will be used after the modeling exercise.  Huge mistake!  You don’t just start building a 4-bedroom house without an architect do you?  No, you think through how the house will be used and design the house based on very careful thought.   Your model should be thought through the same way.  I can’t tell you the number of times I have seen a model get too complicated to handle or become useless due to improper architecture thus creating the need to have to start over.
• Make it flexible.  This is probably the most important point.  You will change your model and your drivers.  It’s a guarantee.  You want it to be flexible enough to handle multiple what if scenarios with easy to use input toggles.  I typically try and have one input drivers worksheet that will drive the entire model.  That way you can go to one worksheet and see all the input assumptions and do scenario planning off of the drivers.  It’s also a good exercise to show the historical results of your input drivers to show how aggressive or conservative you are being with your input drivers.
• Get organizational buy-in and if possible include as many people in the process as you can (don’t include everyone!).  I have seen many cases where a plan is put in place by the CFO and CEO only to have the person responsible for the major drivers of the plan look confused when presented with the plan.  So include anyone who plays a major role in a driver input in the forecasting process so you have complete buy-in.  It will make the chances of making the plan more realistic and should get everyone on the same page.
• Re-forecast often.  You will know pretty early on if a plan is on target or not.  If it isn’t you should reforecast and update the plan.  I like to do it quarterly but have seen companies do it monthly or even semi annually.  Doing so will keep the team motivated and focused on driving up business value.  Not updating a plan and expectations around it can lead to a team giving up on the rest of the year if it looks like the original plan can’t be put back on track.
•  Waterfall your reforecast.  Waterfall spreadsheets are a fantastic tool in visually seeing how a forecast changes over time and helps create an environment of accountability.  The guys at First Round Capital did a great post on this a few years back and have created an excel template that I like to share.  You can find it here http://www.firstround.com/ModelWaterfall.xls. The waterfall will also help you mark against actual performance, which is equally important.

Well I hope this help and good luck with your forecasting and re-forecasting.

 

 

 

 

 

Comments

[Rob Johnson]

Great advice. I would like to state that keeping your spreadsheet flexible is so damn important.

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When you have to put together a 3-5 year forecast for your initial fund raising it can be a pretty overwhelming task due to the amount of unknowns in the model drivers (especially if you are going after a new and unchartered market). They key to developing this initial forecast is to realize that almost no one will believe it! You unfortunately have to go through the exercise and not taking it seriously will almost always guarantee that you wont get funded. The main things that should come out of the exercise are the following:

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