10-Tips For Building A Robust 3-Way Financial Forecast in Fathom
1. Start with a blank slate
We like to start each forecast with a blank slate - like a new spreadsheet. We set this by using the Custom setup option, and then setting the baseline rule for revenue, cost of sales, and expense accounts to a constant of $0.
We find this allows us to keep track of the forecast development. It helps work through each account one-by-one as those without a rule stand out with their $0 results.
2. Make Drivers your friend
Make your forecast robust with Drivers.
Think of Drivers as input data points. Drivers can be built into formulas applied to accounts in the profit and loss statement.
Drivers can be built at a high-level. For instance Total Customers, Order Frequency, and Average Order $ Amount could be combined into a formula to create revenue.
Drivers can also be in as much detail as you desire. For instance, breaking staff numbers down into separate locations, each driving a separate wages expense rule.
3. Remember - there is no ‘undo’
When developing a forecast in Fathom we can almost guarantee you will wish there was an ‘undo’ ability, as is found in Microsoft Excel. Alas, there is not.
Having no undo means you need to be cognisant of what you’re working on and what it impacts.
We find moving from one piece of the forecast to another, in a deliberate sequence, is the best habit. This links back to why we like to set the baseline rules in the profit and loss accounts to a constant of $0.
4. Design Quick Metrics to become your ‘Canary in the Coal Mine’
When miners venture deep underground they need to monitor oxygen levels. Back in the day this was done with a canary in a cage. The canary would asphyxiate before a human being would, giving the miners time to vacate and ventilate.
The analogy of the brave canary can be built into a forecast. The aim is to see problems before they occur. Thereby, allowing a business to begin adjusting course in order to hopefully avoid the problem altogether, or at least minimise its impacts.
We find the Quick Metrics are a great way to do this. You can select up to 5 inside a forecast and must have a threshold applied.
5. Build off a strong foundation
Financial history is the foundation of a forecast.
How accurate and up to date are the financial records? Do the story of the figures match reality?
Verify the profit & loss and the balance sheet. Understanding the past and present, is what creates an ability to control for the future.
If the historical data is wrong, then any forecasting effort will go askew. If there are errors, go back to the source. Review your reconciliation timing and processes.
6. Test the downside
Once what Fathom calls a ‘Main Forecast’ is built, you can then begin constructing Scenarios to test various possibilities. What if things go better than you planned? What if they go worse? What if things track ok, but take longer than expected? What if things speed up? What if you add? What if you reduce?
Generally speaking we like to run scenarios to test the downside risk. Think - under what circumstances do my assumptions break and things have to change? What do I need to be looking out for? How can I best keep track of that? This links back to the notion of canaries in the coal mine.
7. Use Microforecasts to illustrate key decisions
Microforecasts are forecasts inside the primary forecast. We sometimes think of them as ‘what ifs?’. What if we hired a new person? What if we bought that factory? What if we won that contract?
The beauty of a microforcast is that you can build an entire world inside a single one, or build out a story with multiple. Inside each the outgoing and incoming cash movements can be represented, and timing can be adjusted with a drag and drop inside the Business Roadmap.
Microforecasts can even be turned on and off, or they can be combined into various Scenarios. Remember, you can duplicate them. We often find this comes in handy.
Tip - Microforecasts will only show Quick Metrics inside them, so take the time to design your Quick Metrics in detail.
8. Add Notes & Assumptions
Because there is no undo and no ability to track your progress inside Fathom it can be very useful to make notes along the way. Like breadcrumbs in the forest leading back to your original thoughts.
Inside each rule applied to accounts in the profit and loss, plus rules on Drivers, it is possible to leave a note (like a tweet the characters are limited), and include it in a Assumptions report.
The Assumptions report is available inside the Reports section of Fathom. Look for the Tables section, and select Forecasting. There you will find the ability for Fathom to create a single table listing all of your critical assumptions.
This can prove particularly useful if your forecast is being sent to third parties such as banks, lawyers, accountants, or other companies.
9. Make the complex simple with Reports
The forecast is a tool to inform decisions. Period. Therefore, the forecast must communicate clearly to those making the decision.
Fathom Reports has a world of functionality. Dive in! It is a drag and drop interface and no programming knowledge is required. Think about how to make the insights you discover land with your audience.
If you do end up designing a piece of reporting gold, there is the ability to save that report as a template and schedule its creation automatically. You can also duplicate a report and simply update the period.
10. Refine the forecast as actual results roll in
The only guarantee of a forecast is that it will be wrong. The issue is how wrong, where is it wrong, and why is it wrong?
Fortunately, this is easy enough to track but loading the forecast in as a budget. This can be done inside Settings, or inside the Forecast itself. The forecast output can even be applied to individual Key Performance Indicators.
Using the Analysis and Reporting functionality you can quickly see what is on and off track. Wherever there is a difference you want to think;
Does something need to change in the forecast? Is the business actually doing fine, but you have made a mistake in your forecast assumptions?
Does something need to change in the business? Are the forecast assumptions fine, but the business really is over or under performing? What in the business needs to change? Does this need to be updated in the forecast?
Does something need to change at all? Is the variance only minor. Perhaps your printing budget is 100% over for the month, but you are talking about a $50 budget vs. $100 actual. In the grand scheme of things what is the call?
