Who owns the forecast?

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When I first became the FP&A manager of a business unit, I learned a little secret that my boss was keeping from me:

The company was evaluating my forecast accuracy and sending it to the head of the business unit.

It was like I was back in school.

Every quarter the business unit head would receive a report card that showed my forecast accuracy relative to all the other business unit forecasts.

And we were in last place.

Ouch.

The most difficult aspect was elements of my forecast were simply inputs from the business.

Should I trust the business for the forecast inputs, knowing they might be wrong?

Or…

Should I work to develop my own forecast inputs, knowing I could probably get more accurate?

Pros and cons, but I’m going to argue that a business-owned forecast is better.

Sure, there is opportunity for finance to own elements of the forecast (we’ll discuss this below), but a business-owned forecast has more strategic benefits than the potential downfall of worse accuracy (in my professional opinion).

Let’s jump into why I feel that way:

What is the purpose of a forecast?

It’s a big question, but worth a direct answer.

The purpose of a forecast is to help the business owners 1) understand the direction of the business and 2) make better decisions on what to do next.

Which means accuracy is important.

But alignment is even more important.

What is alignment and why is it so important?

When your forecast is a direct output of the underlying business trends and what the business plans to do in the future, you have perfect alignment in your forecast.

For example, the Sales team is adding a new closer which should increase sales by 10% next month and every month in the future.

Your customer support department sees the increase in sales as a trigger to add another staff member to field the incoming support calls.

Your forecast then reflects the increased revenue, increased cost from sales staff, and increased cost from customer support staff.

Perfect alignment!

But what if the last time the sales team added a staff member there was no noticeable lift in sales?

Even worse, what if the last 5 sales staff hires didn’t produce incremental sales??

As a prudent finance professional, we now understand that our forecast accuracy is in jeopardy.

We’re about to add costs without seeing the increase in revenue in the business.

Sales and profit will both miss the forecast.

What do we do??

Messaging versus accuracy

What’s going on here is a common push/pull between messaging and accuracy.

As the head of Sales, you are committed to increasing revenue to hit the company target.

And the best lever you have is to hire another sales professional to do that.

In order to hire that sales staff, you need to prove the return you’ll get for the investment.

The head of Sales is not incentivized to be accurate. They are incentivized to tell a story.

But as the finance professional, you are incentivized to be accurate.

That’s the rub.

Finance owned versus business owned forecast

This is the exact spot where you’ll start to get mixed opinions on forecast ownership (I’ve done both in my career!)

The traditional finance leaders will say:

• Don’t approve the hire to staff until they can prove a return on investment that we feel confident in

• If you can’t show a return and I don’t approve the hire, it’s not going in my forecast!

The modern finance leaders will say:

• Sales is held accountable to the revenue targets, so it’s up to them to decide what to do next

• It’s not our job to meddle in the Sales strategy. Sink or swim my friends, we’ll put it in the forecast!

There are clear pros and cons of each approach.

A finance-owned forecast can become disconnected from the business. If finance is the one running the model, then why should the business give any info to finance? They are just going to use the forecast to prove Sales wrong about their projections.

In this case, you’ll watch finance and the business slowly drift apart. And your ability to do driver-based forecasting will slip away.

A business-owned forecast clearly has the ability to become as worthless as the excel sheet it’s written on. Wild and ungoverned assumptions might show revenue increasing 5% month over month after a period of revenue decline for 18 months straight.

In this case, you’ll watch executives in the business stop valuing finance and the forecasts we produce. Why bother publishing fiction reports every month?

Soooo, both options suck.

But which sucks the least? And how can we mitigate the suck?

My preferred solution is…

Like most things in life, the answer is nuanced.

And I like to facilitate a business-owned forecast with guardrails and accountability.

Here’s what I mean:

• For every financial driver that is known, we let the business own the input

• For every financial driver that is not knowable, finance owns it with business alignment and backed by analysis

How does that look in practicality (back to our sales example):

• Sales gets tell me the salary and comp structure of the person they want to hire (because that is a known input)

• Then finance will work with Sales to build a CBA (cost/benefit analysis) showing the expected lift in revenue based on Sales-owned assumptions and historical analysis of past situations

  • This often looks like a range of possible outcomes based on historical analysis and desired outcomes.

  • The analysis will show historical investments in sales staff yield no lift.

  • But there will be a proposal on the page that says Sales expects to see an immediate lift in revenue.

  • It appropriately puts the investment decision in context.

• This CBA is used to make a go/no-go decision at the executive leadership level.

  • Is this the best use of our next dollar in spend?

  • If we don’t expect a material lift in sales from the new hire, then should we deploy that dollar elsewhere?

• This forces the business to evaluate the cost/benefit of that decision and explore if our money is better spent elsewhere.

But what goes into the forecast?

If it’s me, I’m using a different revenue increase assumption in the forecast than what was made to make the go/no-go decision on the investment.

And the revenue increase that goes into the forecast is likely a concession between me and Sales. Neither of us are 100% aligned to the pick, but neither of us are upset either.

But the proof is in the pudding; and measuring what actually happens after the investment is the most important part of this process (if you need help measuring causation of business decisions, check out this article I wrote).

Time will tell who was right.

In Summary:

There is no right or wrong answer to the question ‘who owns the forecast?’

So you need to think critically about pros and cons of each option and what kind of culture you are creating with the solution you build.

From my seat, it’s important that the people running the business feel invested and a sense of ownership over the forecast output.

But keep the output in check by mitigating common issues found in a business-owned forecast.

How does this resonate with you?

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