Telling the true story in your financial forecasting model

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
  
  

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.