As your business develops, you’ll need to present your actual financial performance alongside your prior and updated estimates from projections, forecasts, and budgets. This post describes one approach to doing so using cumulative revenue as an example. Developing your own methodology and being consistent in its presentation will make your board and investor meetings much more effective and productive.
First, let’s set some working definitions:
– Projections: multi-year, perhaps three to five or more, typically updated at major events e.g. pre-financing or post financing. Having a well-thought through vision of the financial growth plan is an essential piece of the overall system.
– Budgets: single year, aligned with the financial year, updated perhaps mid-year if there is sufficient reason to do so – possibly from a wide variance in actual performance or the occurrence of a major event – making the previous budget substantially invalid.
– Forecasts: single (or shorter) year scope and typically updated every quarter. This is your more granular, short-term vision of the financials. Updating forecasts allows you to take into account your increased understanding and awareness of the business.
– Actuals: your historical financials, with monthly detail that can be summarized to quarterly or annual.
It’s important to present actuals versus your original estimate (budget) and then the updated estimates (forecasts) on an ongoing basis. We’ll limit the example here to top-line revenue for simplicity, but the same techniques can be applied to any element of the financials. Note that this approach is but one of many possible options and you should assess what format will be most appropriate to communicate your financial information. For our example, the starting point is the beginning of the year:
This is simply a 12-month depiction of the cumulative budgeted revenue. Why cumulative? We’re interested in where the business is heading on an aggregate year-long basis and less concerned about month-to-month variations. Let’s now consider a mid-point in the year:
We have the original budget line intact, but with actual historicals we’ve been able to chart the true performance alongside budget. This is useful, but your board will then ask: What do you think will happen next? Where will we be at the year-end? Hence, you need forecasts:
The forecast neatly adjoins the actuals and represents management’s opinion on likely performance through the end of the year. Such a presentation framework facilitates discussion of why actuals differ from budget – perhaps because of a late product release or reduced marketing efficiency – and includes a clear description of what steps are being taken to meet or beat forecast through year-end.
Develop whatever approach best suits your business model and dynamics and stick to a consistent presentation and periodic update schedule. Analyses such as these provide a framework for assessing the accuracy of your assumptions and planning, which will go a long way to improving your understanding of your business.
Finally, never forget two permanent rules for being prepared with presentations:
– Come up with yourself the question you want people to think of when you show them the chart/table and be prepared with your answer.
– Always review your presentation thoroughly and prepare responses in advance to otherwise unexpected questions that could get posed.