Forecasts
As a CFO and investor, I see a lot of forecasts. Some terrific... some phoning it in.
One of the things I like to see are activity-based relationships. Things like revenues based on sales activities, sales hires that precede revenue growth, capex associated with debt growth, etc.
Modeling it is well enough, but I like to see how folks think about the critical activities in their business. I tend to think that if the forecast is done right, the viewer will understand how the author thinks about their approach.
Too imprecise: They might not be sufficiently considered.
Too detailed: They might be unable to view their efforts at the appropriate altitude.
I've met a lot of finance heads that are convinced of the supremacy of their approach. We can all agree the forecast is a story about an unlikely future. Maybe it's good enough to write a story where the characters are well-known to the author.
Forecasts should include activity-based functions, demonstrating how you think and what assumptions you’re operating under.
When evaluating your forecast, here are a few questions to ask:
Are my revenue projections based on specific sales activities and targets?
Have I considered the impact of new sales hires on revenue growth in my forecast?
Does my forecast include capital expenditures that align with my debt growth strategy?
Have I added sufficient investments in working capital?
Do I understand my customer acquisition investments vs lifetime value?
This isn’t exhaustive but the absence of these considerations is recognizable to an experienced investor.
