As a CFO, forecasting allows me to anticipate future trends and make informed decisions about the direction of the business. Accurate forecasting (as accurate as a forecast can be) can have a significant impact on a company's success, as it helps to guide resource allocation and decision-making.
At our company, we engage in a variety of forecasting, including sales forecasting and recruitment forecasting. However, forecasting is not just limited to these areas. It can also inform decisions about budgeting, marketing, and investments. In this article, we will explore how to do it effectively and share how we leverage it within Ladder:
The Importance Of Forecasting
One of the primary reasons that forecasting is so important is that it helps us to plan for the future. By looking at data and trends, we can create a roadmap for how we want the company to grow and evolve. This includes setting targets and goals, as well as identifying the resources that we will need to achieve them. Forecasting also helps us to prepare for potential challenges or disruptions, allowing us to make necessary adjustments in advance.
Another key benefit of forecasting is that it allows us to track our performance and measure our success. By comparing our actual results to our forecasted numbers, we can gain insights into how well we are executing our plan and where we may need to make changes. This can be particularly useful when it comes to budgeting and resource allocation, as it helps us to identify areas where we may need to invest more or cut back.
Ultimately, forecasting plays a vital role in the success of any business. By anticipating future trends and making informed decisions, we can position our company for long-term growth and stability.
How to Start Building Your Forecasting Model
By predicting future trends and making informed decisions based on data, we can set ourselves up for long-term growth and stability. At our company, we engage in a variety of forecasting, including sales forecasting and recruitment forecasting. However, the starting point for forecasting should always be the beginning of the customer journey.
This means understanding marketing data and investing in the channels that will drive traffic and leads. From there, we can consider the sales process and the revenue that is expected to be generated. With this information, we can then make informed decisions about staffing and resource allocation, as well as budgeting for future investments and growth.
It's important to note that the current market environment may require a more short-term focus on forecasting. With the macro situation we’re in (January 2023), we decided to go against “best practices” of 12 months and longer forecasting and switched it to quarter by quarter forecasting instead. Adapting a volatile macro environment and shortening our timelines will help us be more agile and responsive to changing market conditions. Traditional best practices are important, but it’s necessary to “break” them when circumstances demand so. Now we will only focus on Q1 and disregard the long-term forecasting because the standard deviation of trying to plan for 12+ months is too high for us to make predictions on.
Ladder uses a model with three scenarios - the good, the bad, and the break-even - to inform our forecasting efforts. This helps us to anticipate different potential outcomes and make informed decisions about how to respond to them. We also have regular check-ins and deadlines to ensure that we are staying on track and making necessary adjustments in a timely manner.
It's also important to involve the heads of various departments in the forecasting process, as they can provide valuable insights and make requests for budget in advance for the year. By ensuring that everyone is involved and contributing to the forecast exercise, we can make informed and strategic decisions that drive business success.
One example of how forecasting has had a positive impact on our company is in the area of hiring. For example, by anticipating higher-than-expected revenue growth, we were able to start hiring in advance and create operational leverage. This allowed us to build a strong team and set ourselves up for success.
Forecasting Challenges and How to Overcome Them
One of the challenges of forecasting is that it is difficult to predict the future with complete accuracy. However, by using a combination of historical data, benchmarks, and market trends, we can create forecasts that are informed and reliable.
The market can be volatile and circumstances can change rapidly. It's also important to regularly review and update our forecasts as new information becomes available. By staying vigilant and adapting to changing circumstances, we can make sure that our forecasting remains a valuable tool for driving business success.
Effective communication is also crucial for ensuring that the benefits of forecasting are fully realized within a company. As a CFO, I understand the importance of sharing the forecast model and its results with the CEO and other members of the executive team. To facilitate this, we have a model that is accessible to everyone and is updated on a monthly basis to show how we are performing against the forecast. In addition, we have regular finance meetings with the management team where we discuss the forecast in greater depth, including any variances and how they may impact our plans.
By anticipating future trends and making informed decisions based on data, we can set ourselves up for long-term growth and stability. While forecasting can be challenging due to the unpredictable nature of the market, using a combination of historical data, benchmarks, and market trends can lead to informed and reliable forecasts.
It's also important to regularly review and update forecasts to ensure they remain accurate and to be prepared to adapt to changing circumstances. By staying vigilant and adapting to changing circumstances, we can ensure that our forecasting remains a valuable asset for guiding our strategic planning and decision-making.
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