Re-forecasting Your P&L
As a business manager or CEO, I’m sure you’ve heard of the word “Plan”. Terminology such as “We’re on track to plan” or “We’re 110% to plan” is very normal in business vocabulary. If you haven’t heard of these terms, don’t sweat it.
I’m here to explain.
The “Plan” here refers to the financials and associated financial drivers that you have agreed to with your key stakeholders. These stakeholders are typically external — board members and investors. The real term is actually “Operating Plan”. The operating plan is nothing but all your financial statements forecasted out for the year and built up in a bottoms up manner.
Some businesses choose to build an operating plan top down and bottoms up and then align both those plans. The CEO will basically say “Here is my top down plan. Here is what I want to see with the business next year”. His or her team will go and build a plan that’s bottoms-up and align to the top-down plan a.k.a. “Make it work”. Then it’ really about a negotiation between the top and the bottom. Most likely you’ll land up with a plan somewhere in the middle. With either approach the point here is the final “Operating Plan” is the goal post for the year that you will aspire to get to.
For example: If you decide with your investors and board members that in the fiscal year 2021, you will generate a total of $1MM in EBITDA on a top-line of $100MM, thats your “Plan”. Now it’s your job as the CEO or manager to go and execute on that “Plan”. Your investors are now looking at you to generate $1MM in EBITDA for them. How do you do that? You’ll put a strategy together, you’ll get your operations right, you’ll set goals, targets, build a portfolio of initiatives, get your organization structure right, execute on those initiatives.
So that’s the first level of forecasting — The Plan.
Once the “Plan” has been set, you’re now in execution mode. I like to call this “P&L Management”. When managing the P&L, you’re executing your strategy to get to the plan numbers. As part of this process you should be closing your financial books each week. When you do, you should re-forecast your business to see what the new projection looks like to plan. This is your “Forecast to Plan”. If your forecast to plan is under the original “Operating Plan”, you’ve got work to do and you need to catch up. You should immediately put actions in place, assign owners and get back to the “Plan” the following week. Next week, once the books close, you repeat the process. Once again you’ll re-forecast your plan and compare it to the original plan. If you’re track you and breathe a little and run your business as usual. If you’re behind, you’ll have more catching up to do.
You see the advantage of this approach is that you can real time manage your business and consistently track progress towards achieving plan and take action immediately. You’re an active plan manager and not a passive plan manager. You won’t have to wait to take action at the end of the quarter or at the end of the month. It’s very possible that things could get a little too late by then. So instead, this approach of consistently re-forecasting lets you follow an active approach to P&L management.
Aim to become an “Active P&L Manager” through constant re-forecasting.
Q&A
- Should you be forecasting more often?
Sure you can forecast daily or even every second if you’d like, but even if you get that data that you’re behind plan, will you be able to take an action on it? When you should re-forecast should be determined by when you can take action and the action can show meaningful results. I prefer a weekly re-forecasting schedule because in my business, each week I can make changes that will move the needle.
2. When should I start forecasting for the next year? i.e. create the original operating plan.
My view on that is to create your operating plan on a rolling basis. For example: 6 months into the current fiscal, you should forecast the rest of the year and the next fiscal year. That way you’ll get a view on what needs to be done for the next fiscal year.
3. My actions are not weekly actions, but more strategic. Then what?
Not a problem and very normal. Your actions as an “Active Plan Manager” will be a mix of both strategic and operational. Aim for operational actions weekly like discussed above. Aim for strategic actions every quarter or every 6 months. You should sit with your teams at least twice a year, review your forecast to plan and put action programs in place that are more strategic in nature. You might have to cut projects if you’re behind or invest in new projects to achieve your plan.
4. But this is all about hitting a plan. I want to crush my plan. Then what?
Great. You’re an overachiever and want to overdeliver. In this case create two “Operating Plans”. Create an “External Operating Plan” that you’ve agreed to upon with your board and investors as discussed above. Then create an even more aggressive “Internal Operating Plan”. Then drive your entire team to that internal plan.
5. Should I be forecasting all financial statements — Income Statement, Balance Sheet and Cash Flow Statement
Try to actively forecast as much as you can. Sometimes you’ll have to wait for the month end to forecast certain financial numbers as your finance team might be closing its books for the month. The key here is to do your best in forecasting out the numbers from your financials that you want to manage on a regular basis and ones that you can take action on regularly.
Hope you’ll use this framework to run your businesses going forward. In future articles, I’ll give you more ammunition to manage your business. I’ll talk about how to use moving averages to understand trends on different numbers in your business, that will facilitate immediate action. I’ll also discuss how to not only just look at the financials of your business, but also the drivers to those financials and how to manage to those. Lots more fun stuff in the pipeline.
Till next time,
KC
