No one can predict the future (or at least not that I know of) but businesses need some line of sight into what tomorrow might bring. Note that I used the word “might”. Although no one can know with certainty what the future holds I think it’s worth putting a stake in the ground in an attempt to plot out the future that one is trying to create. Again, note the use of the word “create”. The use of the word create with respect to the future has a very different implication than mere forecasting.
Right now I have two clients with whom I am working to relook at the rest of the year. Although the circumstances are very different, the underlying issues are very similar. In one case, the client is running ahead of their revenue and profit goals. Four months into the year they have made one third of their revenue goal despite the fact that Q1 is usually soft relative to the spring and summer. In the other case, the company is clearly behind expectations coming in below budget (although perhaps an overly optimistic one) but also below year ago.
But the initial reactions from both teams were somewhat similar. There is a reluctance to put a stake in the ground for the rest of year beyond what they believe they know today. In the case of the first company, they are predicting a breakeven second trimester and a loss in the third trimester. The farther out into the future we go, the less committed backlog exists and people seem unwilling to commit to anything other than “known” contractual commitments from customers. I don’t actually believe the dire forecast that some members of this team have put forward. If I did, I’d be suggesting that we prepare to close the doors later this year. What we are dealing with is simply a reluctance to commit to a goal for fear of not achieving it.
The second company is dealing with a very similar issue although they have a very different starting point. The first trimester was not kind to them resulting in a small loss for the period. It’s recoverable assuming that the full year comes in on plan which everyone still believed as we discussed this issue last month. But at this point, it’s imperative that we take a hard look at the rest of the year and ask ourselves if we are confident in the forecast for the coming months and whether we have a true commitment to take action to deliver a top line result in line with those expectations. If yes, we should charge at it hard. If no, it’s expense cutting time.
In both cases, my task is the same. It’s getting the teams comfortable with setting a goal for the future about which there is some level of uncertainty and feeling ownership to achieve that goal. I’ll admit this can be hard especially for those who haven’t done it before. It’s uncomfortable to commit to a goal when there isn’t complete certainty on how you might achieve it. That said, there is never an exact blue print of how greatness will be achieved. And even if your plan for this year is short of greatness, the path beyond the next few months is sure to be hazy and ultimately contain a few unexpected twists and turns. But that doesn’t mean it’s not worth plotting a course.
The process of setting expectations can be enlightening. Not only does it force one to think through what it takes to get from Point-A to Point-B but it also gives one the opportunity to reflect on whether initial assumptions may or may not have been accurate and if not, then why not. In addition to being time well spent. it allows the finance team to assess and plan for funding requirements. Some things are certain . . . like payroll. No one likes to miss it.
For much, much more on this topic, you can find an eight part pod-cast series on my website by following the link to The Power of Prediction.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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