"Any advice for a small tech startup trying to boost forecast accuracy in its first year of operation? We don’t have extensive operating history and thus our actuals are varying significantly from forecasts?"
This question was asked at a recent webinar, now available on-demand: "Calculating Financial Forecast Accuracy"
Please add your thoughts about it below. Thanks!
The key is in making sure your forecasts tie to activities being taken on by your personnel. Are those activities needed to reach those targets doable? You'll need to help everyone get clear on the revenue targets that they are committed to achieving and maintain a dashboard showing the leading indicato for those results.
Similarly, you'll need to help everyone get clear on the available budget for that time period and from that point it's a matter of the inegrity of the team and the real-time availability of information as to how much of the budget is remaining.
1. Question and reexamine your assumptions.
2. Question and reexamine your assumptions. ...again
3. If possible, and since start-up life is so dynamic, think about a rolling forecast/budget.
The reality is, it does NOT make sense for a start-up to have yearly forecasts. Budgets are tied to your funding amount constraints. i.e, you make do with what you have. Your forecast and budgets tend to be mere WISH points at this juncture.
In conjunction with budgets (for whatever it is worth to your outside parties), I would suggest prioritization of expenses. There will be tons of unbudgetted and unforeseen expenses and your funding is finite so resource (cash) allocation should be paramount.
In addition to the good advice given above I would also add that budget accuracy will only improve with time, when you have better historical data and a more realistic budget model. What I always recommend, which is especially critical in a start-up company, is the need to forecast cash as accurately as possible, as your success is dependent very much on availability of cash at certain points along the forecast period. Taking it one step further, forecasting the entire balance sheet is a goal you should move towards. There are software tools on the market that will allow you to do that, and your investors, be it angels, VC or other will greatly appreciate it.
Another tool you should use in preparing your budget model is drivers that will cause the budget numbers to be calculated automatically and placed in the correct forecast period. Developing certain KPIs in your actual business will help defining these drivers and contribute to better accuracy.
And finally, if your budget application allows you to drill back / down into your actual GL, you'll be able to see some of the causes for the inaccuracies or variances between you budget numbers and the actual
In a start-up situation it may take a little time before reliable historical data is available and KPIs and drivers can be established. However, it is never too early to start thinking about doing all this, since the benefits are significant even for a start-up company.
In addition to all the great advice above, I would recommend benchmarking to other businesses for your expenses. What public companies most closely resemble your business model? Can you use a sample of a series of very similar business to get an average gross and net margin, selling and
Also check out the
If you are only focused on revenue, then remember price times quantity equals revenue so, ball park the average price of what you think your product/service will sell for times a forecasted volume and continue to refine every month
