Predicting the Future
You may have already heard me preaching the Financial Projection gospel,
About how small business founder who think Finance is useless
Often feel that way because they’re only looking at historical financials
Aka. Financial Statements.
In order to unlock the power of your Finance department,
You need to get out of the past
And make some predictions about the future.
But here’s the thing:
How do you predict the future?
In a world where we can’t even trust the weatherman to give us an accurate forecast,
How the heck can we expect to do any better?
An answer, in 2 parts:
Part One: You don’t have to be right for a forecast to be useful.
Here’s why: A great financial model predicts the future given certain assumptions
But a model’s value is less about the assumption accuracy and more about the predictive relationship between variables.
It helps you to understand your constraints as you run your business.
Sales not quite as high as you predicted?
No problem with the model; just correct it.
But when you do, you’ll note that now your model tells you your costs also need to be lower, or else you won’t be profitable
And THAT’S the real value of a predictive model.
So as long as the math is right,
Your assumptions can be wrong,
Because you have plenty of opportunities to correct them
As reality hits the business.
Part 2: You have many options for creating reasonable predictions.
Take revenue for example
(Which can be challenging to predict for many startups and SMBs)
Do you have a lot of historical data? You could use historical trends including annual patterns.
Do you track potential deals in a CRM? You could use your pipeline value multiplied by the conversion likelihood of each deal.
Are you planning to spend money on marketing? You could use marketing spend and conversion metrics to predict the number of new customers converted each month.
Doing none of these things? There are still a gazillion other ways that we can reasonably predict your income.
Predicting future finances can seem impossible,
But, when you realize it’s okay to guess and correct later,
And that there are an almost infinite numbers of way to do it,
The new question becomes:
What excuse do you have left not to?
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