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Juanita Schwartzkopf

The Financial Forecast and KPIs: Both Line the Path to Success



By now successful businesses have either finalized their 2025 financial forecast or are in the process of finishing that forecasting.  A business that does not have a financial forecast development and monitoring process is setting itself up for failure.  If a business develops a forecast but does not have a plan to monitor performance to the forecast through Key Performance Indicator (“KPI”) reporting, the business is setting itself up for failure – as if it did not have a forecast to begin with.


The first step in the financial planning process is the forecast for the next year.


The 2025 Forecast is Key

While forecasts are not perfect, having a plan for the next year is a critical part of the overall management process for a business.  A forecast is not just a financial plan.  To be successful it must be a financial, operational, and sales plan, which will result in an acceptable financial result for the business.  The leaders of each of these business functions, finance, operations and sale/marketing, must go into the year knowing what their performance expectations are and how they contribute to the overall success of the business.


Many businesses look to their finance department to put together a forecast.  Remember that most accountants are very comfortable reporting the past and very uncomfortable forecasting the future.   The entire management team must support the need and development of the financial forecast.  The finance team should put together an initial draft forecast, but the sales and operations teams need to provide input and be actively involved in the process that develops the final forecast for the new year.


Each part of management of a business must support the financial forecast for the coming year and understand that they actively contribute to the success or failure of the business.  Business management is a three-legged stool with finance, sales and operations all working together to make sure the stool stands. 


High level numbers such as sales need to be supported by a robust build up.  Which sales sources will support the forecast with what expected dollar amount?  Which divisions will support the forecast at what dollar level?  What sales categories support the forecast for sales?  Look at pipelines, look at contracts, etc.  But also look at past activity by month, by quarter, by division.


Payroll and benefits need to be supported by a detail buildup of direct and indirect labor by individual, work category, department, etc.  Percentages of sales will not work.  Labor is more a fixed cost than a variable cost and will not be reduced in dollars without plans and triggers to make those reductions happen.


A forecast must be built up.  It cannot be high level or based on percentages of sales.


Once the management team has agreed on a forecast for the new year, the next step is determining how to monitor performance to plan.  Most companies rely on monthly income statements prepared after month end to monitor performance.  The monthly income statement reporting does not provide real time data that will quickly provide decision making performance data which will in turn result in management decisions to increase the likelihood of performance success.

 

KPIs Track Performance in Real Time

Every business needs to develop Key Performance Indicators (KPIs) that will allow real time tracking of performance to plan.  These KPIs can be daily or weekly performance tracking. 

The benefit of a daily KPI on shipments will, for example, provide tracking toward sales goals each day and provide the shipping, operations, and sales department feedback on performance to plan within 24 hours.


The benefit of a daily tracking of KPIs related to accounts receivable will provide immediate performance data to the accounts receivable and collections management departments, and the sales team.


The benefit of a daily tracking of labor hours, including overtime, provides operations and finance with important information to increase or reduce hours as needed and to provide insight into immediate cash needs.


The benefit of tracking production provides operations, sales and finance with insight into the likelihood of meeting shipment plans, levels of accounts receivable, and timing of cash flow.


The benefit of tracking rejections or other quality measures provides insight into operations performance, possible issues with shipments, impacts on accounts receivable and cash flow impacts.


These are just a few examples of how a KPI reporting plan provides leadership at every level of the organization with real time information that allows immediate improvement and adjustments to occur.


KPIs need to be tailored to the people using the information.  A shift supervisor might benefit from labor, production, and rejection data for the shift being supervised by that supervisor.  The plant supervisor might need each shift and production line but will also want a total production per plant.  The division operations manager would also need total KPI performance for the division.


Is KPI tracking information visible when walking through a production facility?  Employees, as well as their supervisors, benefit from knowing the performance plans are being achieved.  An operation without visible performance tracking for all employees will not meet its plans.


KPIs are not just for manufacturing companies.  Retail and service also need to use KPIs.  For example, sales per channel per day or sales per store per day are important.  Number of meals served, hotel occupancy, or average ticket value are all important for retail and service sectors.

 

The Bottom Line

A business will not succeed if it does not have a plan to succeed.  That plan to succeed is a forecast for the next year.  The measurement of performance to plan must begin with daily KPIs, building to weekly and monthly KPIs, and then finally building to an income statement budget to actual reporting tool.


You cannot change what you don’t measure!


Please contact Focus Management Group for help evaluating forecasts, KPIs and performance to plan reporting.  Spending time in the next few months finalizing 2025 plans will result in a higher likelihood of success.

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