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Should the Forecast be realistic.

I have a perennial struggle with senior management over the revenue projections to include in our forecast. The struggle breaks down to a difference in the perception of what we think the forecast should be.

I think that the forecast should serve as a planning tool. As such, the revenue projections should reflect what we think the most realistic scenario is. In that spirit, it should be neither overly aggressive nor overly conservative, since we will be using those revenue projections to forecast both profitability and cash flow...which in turn will inform our planning for capex, headcount expansion, etc...

However, my senior management appears to perceive the forecast as a performance benchmark. So, the revenue projections are more of a "stretch goal" against which we will assess performance of our sales staff. If certain departments give me revenue projections which reflect growth that more or less mirror our historic performance, I am asked to push back on these projections. On the contrary, overly aggressive projections are rarely questioned.

Clearly this approach is not the most conducive for a realistic forecast. Nevertheless, I am asked to use these projections for our profitability and cash flow forecast...which in turn is used for our planning process.

I am curious to know if any of you have had similar experiences. And, if so, were you able to satisfactorily resolve the issue.

Answers

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

My first question is:
When you back after a forecast period, how close did you come and why?
If the stretch forecast ends up at 99% achievement, maybe that's fine. Because a cautious forecast may have resulted in lower actuals being achieved. Whereas a 90% achievement will support your view.
Note: watch out for aggressive selling this period that comes back to bite you next period.

Anonymous
(Controller) |

I'm not talking about a "cautious" forecast. That's just as bad as an aggressive forecast.

I'm talking about a realistic forecast...one informed by actual experience.

We have never come close to our revenue growth projections.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Think about these (top of my head)...

(1) if your revenue forecasts are NOT realistic, then your COST component/basis/assumptions (to produce the level of revenue) will be out of whack and therefore will result in erratic variances, which makes your "forecasts" even more worthless.

(2) the forecast is also used as a planning basis for cash or capital requirements. Having a stretched capital need will result in an unnecessarily expensive funding costs.

(3) And the most important thing (at least to me)....using the forecast as a performance evaluation basis should be viewed as it is. A performance base. I think I have said this before on a previous discussion. The forecast should NOT be used as a CARROT nor STICK (depending on how you view it) to motivate employees. There are other PROPER ways and means to motivate employees that does not do damage to the company culture.

Anonymous
(Controller) |

Thank you. Could you explain more what you mean by using the forecast as "performance base".

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

"However, my senior management appears to perceive the forecast as a performance benchmark."

You don't skew the forecast for the purpose. Whether an employee exceeds or fails to achieve his goals should not influence how you build the forecast.

Again, I reiterate my more important point. The forecast should NOT be used as a carrot nor stick. It is an outdated tool (practice) to motivate people and is damaging to a good corporate culture and how you view/treat your employees.

Anonymous
(Controller) |

thank you.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If you are on the losing side of this battle with Management, create a realistic budget for your use in managing what you need to manage. This would alleviate some of the issues Emerson talked about.

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