What's the first step in building a reliable financial forecast?
It isn't opening a spreadsheet. It's writing down what you want the forecast to do for you.
I call this the "begin with the end in mind" step. Before I build anything, I sit down with the owner and talk about what we're trying to achieve. Then I write down the one to three big picture objectives and make sure we agree I've captured them.
Why only one to three? Because there's something magical about narrowing the list and actually putting it on paper. It keeps everyone focused. It tells you what success looks like when the forecast is done.
Here's an example from the book. A company had grown to over $75 million in annual revenue. A tough economy and intense competition squeezed cash flow. They borrowed everything available on the bank line and violated critical debt covenants. The owner had personally guaranteed that line. The bank was nervous and asking questions nobody could answer on time.
We wrote down three objectives:
Establish confidence and credibility with the bank.
Produce timely and accurate financial statements.
Provide a monthly financial forecast for the next twelve months.
That was it. Three lines. And they kept everyone pointed at what we were there to do.
Another company wrote down two: implement a reliable forecasting process, and make sure it could be easily updated and published monthly. That second objective mattered. The CEO had tried forecasting before, and it was too hard to maintain. It helped for a couple of months, then died.
So before you build your financial windshield, ask yourself: what decisions do I need this forecast to help me make? Write the answer down. One to three lines. Then build the forecast that delivers it, and use it to drive growth, profitability, and cash flow higher.
Learn more at financialrhythm.com.
IN ENCOREWrite the objectives into the build
When you build a model with Encore's Model Builder, start your instructions with those one to three objectives. They shape what it builds: which statements, which drivers, which reports.
Its final step writes a Model Guide, available from the Help menu, explaining how the model works and how to run it each month. So the objectives, and the method, stay written down long after the build.
And Philip's second example, a forecast that's easy to update and publish monthly, is the job Encore was designed for: import the month's actuals, and the reports regenerate.
REALITY CHECKTrusty, but verify-ty
The important thing is the three objectives.
Encore's Model Builder is an acquired taste. You need an Anthropic (Claude) account that lets you get an API key and buy tokens. Once you've cleared that hurdle, and gathered sample data, account structures and reports, the Model Builder is sweet. There's a place to list your objectives for the model, and in theory it listens to you.
We named Encore's AI assistant “Trusty,” but maybe she should be known as “Trusty, but verify-ty.” Just saying.
You can also build models by hand, or start from one someone else has built. Encore ships with a model for an HVAC sales and service company with three locations, and we'll be adding more prebuilt models over time.
Rusty Luhring, co-founder of Ferox