10 Forecasting mistakes (and how to avoid them)
I’ve seen 100s of financial models in my career…
and 9/10 times, I see the same mistakes over and over again.
Understanding these mistakes will put you ahead of the game, and allow you to get much more value out of your forecast.
1. Not including all 3 statements
This one to me is the most important…
and feeds into so many other areas of your forecast.
Now, to be fair…sometimes, you have a company that’s so large…
that you won’t have all 3 financial statements in your model.
And that’s OK.
But if you’re a startup or SMB, this is a quick way to unlock a ton of value in your forecast…
and feeds into a lot of the next areas
2. Does Not Include Actuals
Your financial model should not just show your projections…
it needs to also show your ACTUALS…giving visibility into where you’ve been.
This is helpful for when investors request information…which will almost always involve both your actuals and projections…
but is also very helpful in validating your projections.
Although the future can look very different from the past…you’ll want to show a gradual transition, and generally no spikes in your first month of projections.
3. Chart of Accounts don’t match to accounting software
When your chart of accounts don’t match to your accounting software…
your model becomes much much harder to actualize.
And it’s through actualizing your model that you get to understand what assumptions you were right about…
and which need adjustment.
4. Cash is not dynamic
Remember our first mistake? Not including all 3 statements?
Well here’s the biggest reason why.
When you include your Income Statement and Balance sheet, you can easily create a statement of cash flows, using the indirect method.
You should never need to showcase separate assumptions for your cash flows…
you can just tweak your assumptions on your balance sheet and income statement
5. Inputs & Assumptions are not consolidated
Odds are, you’re not the only one managing your forecast.
The structure of how you have your forecast set up will help you collaborate with others…
and one of the best ways to do that is to consolidate as many of your inputs & assumptions in one place.
This will allow you to see quick results to assumptions that are tweaked, without having to make edits in multiple locations
6. No error checks
Your forecast has thousands and thousands of cells…
each one that can throw off your entire model if just one item is updated incorrectly.
With error checks, you avoid needing to check your cells one by one, which is simply not possible.
Error checks notify you whenever you have a mistake, and stay quite whenever all is functioning properly
7. No ongoing analysis
Your forecast is only as strong as the last time you analyzed your results against what you had projected.
Most people make the mistake of treating their forecast as a one time exercise…
but that’s like buying a car, and letting it sit idle in your garage after your first ride.
Your forecast should be continuously analyzed, tweaked, and updated to ensure you have a clear picture on where you’re going, and what’s happening in the business
8. Forecast not compiled collaboratively
Most companies have many departments…
The list is endless…
and it’s simply not feasible to have all the details on what’s happening in each department.
That’s where collaboration is key.
Collaboration means you meet with other department heads, collect their inputs, and review performance with them.
This is where you tap into your interpersonal skills, and build relationships with others to deliver the most value in your role in FP&A
9. Information is too complex to understand & update
OK...I’ve been guilty of this one.
There’s generally a tradeoff between including detailed complex assumptions…
and simple generalized ones.
My stance is to always start with general assumptions so that others can understand, allowing you to more easily validate those assumptions.
From there, you can get more detailed & specific as you see fit
10. Data is not shown on an annual, quarterly, and monthly basis
It’s not enough to analyze what’s happening with the business in just one timeline…
seeing how that data looks on an annual, quarterly, and monthly basis can help you get quick insights into what assumptions need to be tweaked.
My preference is always to forecast on a monthly basis, and then simply aggregate my results on a quarterly & annual basis
Those are the 10 most common mistakes that I see with the forecasts I inherit…
the truth is, there are countless more.