The longer I work in FP&A the more I realize business leaders are unreliable at forecasting.

What usually comes from the business in the way of a forecast is actually either an overly-aggressive hope or an overly-conservative sandbag - depending on what time of year it is:

Which means FP&A is left to either adjust the business input or develop our own forecast. Neither of which builds a positive relationship with the business.

“That’s the finance forecast” will be what you hear if you come over top of the business input.

But there’s a better way - one that builds a bridge with the business without sacrificing quality.

Let’s talk about the secret 3rd door…

I’ve said it before and I’ll say it again - forecast accuracy is the north star for FP&A.

And when it comes to revenue forecasting, I argue that it’s where our credibility lives or dies.

As a finance function, we cannot simply be hands-off the wheel with what the business submits to us. This is where I see immature FP&A teams go wrong. They simply act as a passthrough for the business to submit whatever they want through FP&A’s forecast models.

I’m not 100% against that as an approach - especially for non-financial measures or insignificant financial drivers (certain OpEx categories, etc.). But if you’re doing this with material drivers of the business I’d argue that you don’t have a full understanding of why FP&A exists…

If your first step in the forecast process is to send your revenue leaders a blank template and say “please fill out and complete your revenue/sales forecast by EOD Friday…” then you’ve already lost the fight.

Instead, FP&A needs to be the first one to put a number on paper and ask the business to react to it.

Why?

Because we learn that in a negotiation, the person who says the first number anchors the price. Then the other party must justify variance from that number.

And while a healthy business partnership should not feel like a negotiation, the same principles apply.

When FP&A does the research to study the trends, understand the root cause and drivers, and then put on paper what they think the next 3-15 months will look like - you put the burden of proof on the business to argue why that’s not the right number.

And you also position yourself as a value-added business partner who is bringing insights and an opinion.

It’s truly a win-win.

Another principle I live by is FP&A should be an analysis factory - constantly producing analysis that moves the business forward.

But where I find CFOs/VP/Directors get this wrong is that they don’t know why they are doing analysis. Which means they don’t know where or how to apply the analysis. A good FP&A team is pumping out analysis that might land (or not) - a great FP&A team is using every piece of analysis to shape their forecast.

For me, it’s simple. Every piece of analysis should:

The second one is the key for FP&A developing a better revenue forecast.

More plainly stated: the analysis should inform the forecast.

Let’s play this out…

You present the next 15 months of the sales/marketing funnel to your revenue leadership - each component of the funnel is deliberately forecasted and each month’s revenue is supported by analysis from your team (the way I teach).

It’s bullet-proof. Every cell in the spreadsheet can be supported. And the business hasn’t touched it yet.

The conversation immediately shifts from: “please return the templates by EOD Friday” to “here’s what we’re expecting revenue to look like if nothing changes” and “are you planning on doing anything different with these inputs to change the trend?”

You’re now in a business conversation - where the focus is on the output (revenue) and if the business leaders want to present any new initiatives or funding requests to improve the number.

It’s subtle, but it works.

And you can delegate this down to anybody on your team - this isn’t just a CFO-level activity anymore if you set it up right.

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