Telling the true story in your financial forecasting model

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When you're quickly pulling together your forecasts it might be tempting to assume that the growth your business has seen in recent years will continue into the future. Phil Gunter-Rees explains how this may miss opportunities to unpack what's really underpinning your performance.

Taking the trouble to map out the exact drivers behind your financial forecasts results in predictions that become a lot more credible than “we think it will be the same as last year’s plus a bit”. In financial model design we can stop and think about how forecasts should be broken down and the layers at play. For instance, we could consider:

  • how much of revenue or profit is contracted in, and over what period
  • the customer churn-rate facing the business, how quickly customers are being acquired, and how quickly they'll need to be acquired in the future in order to meet growth targets
  • which parts of the business are growing most strongly or are most profitable
  • how the opportunity pipeline works and how that feeds through into sales

Case study: helping a client use their own knowledge to build a forecast

We recently worked with a client whose business ran with many long-term contracts and needed to model future growth-plans.

The simple thing to do would have been to take the total of the contracts, apply say an expected 5% revenue growth, and quickly extrapolate that total into the future.

Digging into this, every customer and contract was different. Our client knew all 50 of them and could talk to you about each: whether they were big or small, how profitable they were, and how they could grow.

When building their Excel model it made sense to layer up those individual contracts, thinking carefully how to balance the detail and levers with the need for a model that was accessible and insightful. Filling in assumptions, the client could tell each story knowing they had the commercial narrative to back it up.

The overall result for the expected future revenue growth for the portfolio of contracts wasn’t far from the simple 5% outcome, but was better supported with granular assumptions. Our client, and their stakeholders and funders, could vary the performance of critical contracts, and see where the bigger exposures lay.

Our work here, with real thought around model layers, drove insight and integrity, and helped build a successful fund-raising process.

Building out your forecast to show the thinking (in a clear and transparent financial model) helps demonstrate that the business really can grow into the future. The layers of the forecast separate out and show the business areas that:

  • attract the highest margin
  • are currently growing faster
  • are newer and more exciting, with plenty of promise (but are starting from a low base)
  • are directly relatable to other measures the business has separate forecasts for, such as hits on the website, or the size and effectiveness of the sales team
  • results from customers who come back regularly to make further purchases.

Building up a granular story (via extra layers and Excel lines that unpack the broader forecast) is much more credible and convincing than a simpler approach which takes a base number and just adds a percentage growth rate.

For more insight and guidance, get in touch with our team.

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