Dashboard: Your Forecast Will Be Wrong. Do It Anyway

Welcome to another 21 Hats dashboard. I'm Lauren Feldman and I'm here with Tracy Beck who is founder of the 60inut CFO. Welcome back Tracy. >> Hi Lauren. Thanks for having me. >> It's always [music] great to have you here. Tracy, it's that time of year when the experts say that business owners should be forecasting how their businesses will perform next year. And a lot of business owners respond by saying, "How the hell am I supposed to know how it's going to perform next year?" Um, I know you've recently been working with a group of owners on exactly this. Um, first let me ask, have have you seen the skepticism about forecasting that I'm talking about? Um, especially coming off such a challenging environment like the one we've experienced in 2025. >> Well, skepticism is one word, but I also run into a lot of people who just don't know how, don't have time, don't are afraid to, right? And and just think why bother at the end of the day. So, it's kind of a combination. Yeah. >> Why would someone be afraid? >> Well, when you're leading your team and you go through this forecasting process and you say, "This is where we're going to go and this is what we're going to achieve and these are the goals." And then just like any plan, the second you start to execute it, it has to change. Uh it can be it can feel weird. >> I hear some disagreement on your and >> this [laughter] the dog barking. >> Yes. >> Yes. Sorry about that. He'll chime in and then he'll wander away. >> Hey, it's a podcast. What would a podcast be without a dog barking? >> That's [clears throat] right. Um, so people get afraid because they don't want to look like the leader who didn't know what they were doing, which because when we don't match up reality to the plan, that's what it feels like. But if I can expand on that, um, we look as long as we frame it as this is what we think we are going to do. It's the equivalent of if we don't set out the plan, it's just like getting in a car and telling everybody we're going on a road trip, but not telling them where we're going. And that's [laughter] almost impossible for anyone to help you get there if you don't set out, you know, at least a general a general direction, right? So, that's the point of forecasting. Forecasting isn't saying that you're some all- knowing oracle in the sky and that it's going to be right because you're an incredible leader and you're never wrong. forecasting is saying, "Hey guys, this is what this is the direction we're going. We're on a road trip. We're probably going to hit construction. We'll probably hit a snowstorm. We're probably going to take detours, but this is what we're going to try to do as of today." >> So, you recently led a group of owners through a training process. Correct. >> Yes, that is correct. >> And obviously, they were they wouldn't have signed up for it if they weren't interested in doing it. So you maybe there wasn't the same degree of uh fear and other concerns, but they just needed to learn how to do it. >> Yes. And so at 60-minute CFO, we the three steps of financial fluency are one, two, three. The first one is learning your ratios and what they mean for your business, right? The second one is learning the difference between cash and profits. And the third one is using the past to predict the future, which is planning. And by virtue of the fact that that is the third step, a lot of folks spend the least time on it [laughter] because, you know, it's like, "Oh, come on, Tracy. I learned steps one and two. Don't make me do all three." [laughter] But the point is that we we we have to, right? That's the that's the frosting on the cake. That's the way that we know if we're hitting or missing our goals. So when we learn about our past performance, we have to know what we were hoping for, right? We're learning all this financial fluency and if we don't have any kind of goalpost to measure it against, we don't know if we're winning or losing. We don't know if we want to adjust the plan. We don't know if we're going to end the year the way we were hoping for in our minds. We all have some idea as to like what we'd like to do, right? So forecasting is just getting that more formalized and put down so everyone can see it. So I know you can't take us through a whole course in the limited time we have here but can you give us a sense of how you try to bring these owners up to speed? >> Yeah. So first of all we demystify that this is going to be etched in stone. So I really try to take some of the I guess the when you hear the word for example forecasting budgeting and strategic planning it be it can be kind of intimidating. Those are all uh MBA sounding type words and we think to ourselves, well, I do XYZ in business. I certainly don't have an MBA. Many of us don't, right, who are in business. So therefore, I just really don't know how to do that and I'm not going to do it. And so we take we take that away and we say we're educated guessing. Okay, we are going to use the knowledge of the past to guess at the future. And that's it, right? And then we I I take them through a simple three-step process for forecasting which is uh in broad strokes we have to forecast our revenue. Uh we have and that's a that can be I can go into detail on that but that's the first step. The second step is we have to forecast our expenses right and that's how much we are going to spend on the business to make that revenue. And then the third step is is we have to forecast our balance sheet which which usually no one does. We usually stop at that income and expenses stage. But the reason we have to forecast the balance sheet is there might be something that we buy or sell in the business that's a big asset that's going to sit on our balance sheet. So we have to understand how the balance sheet's going to have to reflect that. And then we might also have to take on loans or we might be planning to pay down loans and those things sit on the balance sheet as well. And those two things uh an increase or decrease in assets or an increase or decrease in liabilities are going to largely affect the cash in our business. And that's a huge concern, right? So we can't we can't stop at just income and expenses. We got to go that one extra step and then actually the rest of your forecasting can be done for you because cash flow using our our Excel templates uh at 60-minute CFO gets calculated for you. all of your ratios get calculated for you and it can really actually be this um quick process if you let yourself just think in broad strokes, you know, and maybe think of this as a draft, right? So, we just we really demystify this doesn't have to be this all day facilitated strategic planning session in in a large, you know, large broad strokes. You probably could sit down and do this pretty quickly, right? So again, we try to make this less of this looming thing and more of a quick you can do this. Uh it doesn't and it doesn't have to be perfect because it's going to change. It's I guarantee you you'll be wrong, right? So [laughter] it's not about being perfect or right. And one of the things that we we say is this does not have to be perfect to serve a purpose. So that that's a large piece of the mentality that you use when you go into forecasting. I want to come back to that and ask you to talk about that purpose a little bit. But first, you you said that you could go a little bit deeper on revenue. H is is that just a matter of somebody saying, "Yeah, I think we're going to be up 5% next year." Or how do you think about that? >> Listen, if you use that kind of forecasting, you would not be the first CEO or CFO to be doing it that way. And it's not necessarily wrong. And it's certainly an easy place to start, especially if you tell me, "Hey, Tracy, I've been up 5% year-over-year every year for the last 5 years." I'd say, "Well, let's not overthink it." [laughter] But I also urge you to if you a lot of people have a lot more complicated businesses going on. They have multiple lines of business. Uh each line of business might have different profitability levels attached to them. Some might be wildly profitable, others might barely break even. So, I recommend uh using what I call a revenue helper spreadsheet where you really just dial that in. You just you start to think through each one and what that profit margin is per line of business and then what you think it's going to be for the following year, up, down, or the same. And then, of course, in order to do that, I you like I said, you can go deep. You can I would recommend making it a group uh project where you sit down with sales folks and you sit down with individuals in your organization who talk to your customers on a regular basis and uh look outside your company. How's the industry? How's the economy? [snorts] What's going on? You know, how are competitors doing? And that that will start to inform you even further. So you again though like if if this is something you need to get done and you're like 5% that's what we're doing. do let's put pep let's put something down today versus putting this off and never doing it. >> I hadn't thought about doing it line by uh business line by business line but of course that makes perfect sense. Um and if you do see trouble ahead when you're forecasting for one particular business line that might inform where you're going to make investments in the in the coming year. Is that part of the purpose that you have in mind? >> Yes. Exactly. What you're going to see when you start breaking it down is you're going to notice that oo we have we have little confidence in this product or business line and then you'll hit the next one and we have a lot of confidence in this product or business line. So you might see threats and you might see opportunities where you want to shift. And the coolest thing about doing this now before you get partway into next year is now is the best time to start planning for that, right? So you can now bring on new or different sales processes, new or different marketing strategies, new or different operational pieces in the company to support what you see coming and let some of that other stuff go. So it's a really it can be really fun and just set you it starts to you start to realize as you do this that you are setting yourself up for success. >> When you went through that with your recent group of owners that you uh took through the process, were there moments of epiphany? Did they realize things about their business that they hadn't uh noticed before and and make those kinds of adjustments? >> Well, yeah. One company in particular brought to me and this has happened before, so I'll use it as an example in case listeners are in the same boat, but a lot of times companies, especially if you're an agency model, doesn't matter what kind, you could be an engineering consulting firm or an advertising firm or a PR firm or whatever, a lot of times you bring on revenue that's actually pass through. So, you might charge your client for services or contractors that you really don't mark up a ton. Um, and then you and then you pay for those services or contractors yourself, right? So, the you're one point of contact for that client that you have, right? And you're housing all those expenses and revenue. And and this client said to me, "This is really clouding my view. I cannot tell >> what we're really doing here. You know, are we just selling more pass through revenue? are we selling it at a lower margin? What's happening here? You know, and so she started to realize that she wasn't able to really see her actual utilization rate of her billable hours because then that's the next step is as your revenue goes up, you're trying to see, you know, how many people are you going to need to serve service that revenue. And so she realized she had an aha that she needs to back out all pass through revenue and all pass through expenses and handle that separately for the purposes of her forecasting. and she can do a separate forecast for anything that's going to end up being pass through and analyze those margins separately, which she was like, I just gained so much clarity from getting that out of here and just looking at how our business runs separately from those revenue dollars and expense dollars. >> Interesting. What would you say is the shelf life of a forecast like this? Do you continue to use it throughout the year or do you suggest adjusting it uh quarterly or how do you think about that? So the last piece of your forecast is you are going to start to think about how the year breaks down into months. And I like to do this in a very simple way, which is analyze your last 12 months of revenue and look at each month's revenue as a percentage of the whole. So, for example, you'll you'll find out that you have peak months and you have low months, and it's going to help you inform how your year is going to start to shape out. So, for example, you might see that 9% of your revenue comes in February, but 12% comes in May, and then July has a dip to 6%. Right? So, that's kind of what you're looking for is these trends. And then you can use those percentages to uh well our our spreadsheet will do this for you. And this is a free spreadsheet. So this is not a sales pitch, but you can then forecast what each month's sales should be. It will automatically forecast then what the cost of those sales or cost of those goods will be. And it will also you can also tell it as a percentage of revenue if you're going to have higher or lower fixed expenses. So now I want you to come in on a monthly basis and put in your actual numbers and the spreadsheet will then compare it to what that forecast was. >> You're going to be above, at, or below, >> right? So you're going to either meet the forecast, exceed the forecast, or come short, fall short of forecast. Now, you might do that for three months in a row. You're below, below, below. You might do it for three months in a row, you're above, you're above, you're above. And you might go above, below, above, below. Right? So if you're below below below, we're going to adjust the forecast [laughter] down, right? If you're above above above, we're going to adjust the forecast up. And if you're up, down, up, down, we're going to say, it's probably probably about right. Right? So I say come in on a monthly cadence and start to see check your work. Did I do a good job or was I wildly off? What happened? And again, this is not where we go, oh, and cast judgment or doubt on our skills as forecasters. We take that whole piece of it away. That is not the point. The point is we're going to be wrong and we want to check our work. We want to know by how much are we wrong and in which direction. >> Do you think your folks learn year over year to do it better? Are there is it a skill that they pick up? >> Oh my gosh, there is a direct correlation to doing this once versus if this is your 10th time and your skill and your comfort. It is exactly like strength training. You go to the gym once a year, it's going to feel real heavy to pick up the dumbbells. You go three times a week, those dumbbells get real light real fast. So, you do this, you will start to realize how in tune and in touch you are because you're going to understand your revenue. You're going to understand your expenses. You're going to understand your cash. And it's an ecosystem. Now, you're like a biologist in your business. You understand the ecosystem. You will predict what happens. You mentioned involving uh staff in this. Um it seems to me that that could be really critical. I if the owner is just uh doing this on his or her own and announcing here's the goal, here's what we're shooting for, that's not likely to be as effective as involving pretty much everybody and getting buy in that this is what the goal should be and this is why it makes sense. Is [clears throat] that your experience? >> Oh my gosh. Yes. So much. And uh let's use the example of a product manufacturing company, right? And let's say that the owner is uh largely involved in business development and sales and relationships and and he's got a finance team and he's got a um creative product development team, right? And so he's out there and he just sees all of this amazing revenue that he can drum up. And so he's thinking to himself, my revenue forecast is this and uh and that's kind of where he stops and he just assumes his margins will stay the same and his expenses will stay the same. If he doesn't come in and talk to people in operations who are like, "Well, we've had a lot of QC complaints, right? Like I think we need to retool." And then he realizes he's talking to the product team and the product team's like, "Yeah, actually we do need to retool and the tools are going to cost us, you know, $100,000. [clears throat] We we will not have an accurate forecast because that $100,000 he didn't know he needed to spend won't be in the forecast. Uh and we're probably going to see a drop in revenue while we fix some of the QC complaints and operate, you know, create a little bit more operational excellence." and and so you can see that this is best done with input from everybody. Now, you could shift my scenario to have more of an operational excellence-minded um CEO who's just really worried on those two things. How much does this cost? Is the product excellent? And then um his sales team, if they don't chime in, is like, "Oh, but I forgot to tell you. You know, our number one client is on a a spending freeze, right?" right? Like we need to know from everybody what we're hearing uh what the forecast they see or you know it could be vice versa. They need to ramp up. They've got you know they're going to need so much from us and we need to get going. So that is all data that would probably come out throughout the year but if we don't ask for it when we are putting our forecasts together we won't have it and it's puts it at a high likelihood of being wrong. So yes, put the team in play. Last time you were here, Tracy, we talked about uh a uh an AI [clears throat] tool that you had developed uh and made available to I think anyone who went to your website to uh input their P&Ls and get financial analysis back. How did that work out? >> Well, it is working great. It is a fabulous tool. AI and finance are like peanut butter and jelly. it goes [laughter] well together. Um, AI loves structured data and income statements and balance sheets are structured data. So, I will add to this that it is also fabulous at doing forecasting and scenario planning. So, >> interesting. >> What what I like to do is >> it does the whole forecast for you. >> Well, so you uh let's say that you Yeah, I mean I would still listen. I I want [clears throat] you to do your forecast. [laughter] I'm not going to tell you to use AI to do your forecast because it doesn't know it. It It's not actually looking at the world as real time as you are. So, I want you to do that. But, you can still tell it what you think is going to happen. And if you are not going to if you do not like Excel, you could just still export your income statement and your balance sheet from last year from your accounting software of choice. Copy and paste it or upload it into the GPT and and say, "Help me build a forecast for next year where revenue grows by 5% and expenses stay the same." Okay? And it's going to say, "Perfect. I got it." And then you'll and then you'll say, "And I have to invest in $50,000 worth of inventory and $60,000 worth of tooling." You know, and then it will adjust. And then you can say, "Now give me one where I increase revenue by 10% and I decrease cost by, you know, x percent." And it goes, so this is what I mean by scenario planning, right? And it goes on and on and on. And then you might say um I'd actually like you can you can have it reverse engineer give me a forecast where I in a blend of increasing revenue and decreasing costs where I will net 10% profit and it will go through all of that scenario planning for you as well and you can say how much more revenue would I need to make in order to get to that right so it's it is you can lean on it for giving you all of that math math and algebra that you would need to do on a spreadsheet uh real time and then and then of course you can ask it for creative ideas. Well, what are some ways I could do that, right? So, it'll chat with you. Again, I that's where I would prefer you put your brain and your team's brains into the mix because you're always going to be an expert in your business more than any AI tool will be. And I I stand on that ground. But, uh do not overlook the opportunity to have it do all that math for you. It is fabulous. It is a fabulous tool. >> Will it do that step three in the process? Uh looking at the balance sheet that nobody wants to do. >> Yeah. I mean, if you put your balance sheet in there, you've got to ask the you've got to give it the inputs like um help me adjust my balance sheet to reflect that I will pay down my loan $100,000 and buy assets to the tune of 250 and it will and and it will recreate your balance sheet for you. Have you had anybody express concerns about sharing their numbers into an AI tool or are people getting over that? >> You know, I actually haven't had anyone tell me that they wouldn't do it. Um, but I know that that hesitation exists. I think when by the time they get to my website to go for the tool that I've probably weeded out the folks who don't want to do it. But I also still tell people, you know, make sure that if you're if you are at all leery, you do not need to include your company's name into this, right? Like these numbers are numbers and there's a very low percentage chance that somebody would be able to track them back to you if you were to use a GPT um with nefarious purposes. But um that would be my recommendation if you have hesitations is to not include the company name. That's interesting because if they just did it themselves and on and their own AI tool and and tried to use it, that AI tool does know who they are and that might be less secure. Does that make sense? >> Yeah. I mean, and listen, I'll just I'm out over my skis as far as how much it knows if you use a custom GPT versus your own. Um, but I think as far as it logging it in the LLM, you know, if you're not like this is uh Microsoft's income statement and balance sheet, you [laughter] know, it would be smart to not do that, right? So that someone else couldn't search it up. But I I suppose uh Open AI [laughter] is your real concern in that situation. >> If somebody wants to uh give your tool a try, it's on the website. >> Yeah, it it is at 60 Minutes CFO. There's a banner across the top that you can click and it'll take you to uh to the tool. >> Tracy, this was great. Thank you so much for taking the time. >> Thanks for having me, Lauren. It's always a pleasure to chat with you. >> Tracy Beck is founder of the 60-minute CFO and co-author of the book The 60-minute CFO. I look forward to talking to you again real soon, Tracy. >> Great. Sounds great. Me, too.