The Secret to Forecasting

When it comes to long-term forecasting, it’s thoughtful to be right, but it’s more right to be thoughtful.

Forecasting can be one of the toughest things entrepreneurs tackle when it comes to financials. But as Bill Reichert, venture capitalist and managing partner at Garage Technology Ventures, will tell you it’s crucial.

“The point is not to try to predict the future,” Reichert says. “The point is to build a financial model that you can improve over time.”

Most investors will tell you they know almost immediately an entrepreneur’s forecasts will be wrong, but this doesn’t mean they aren’t a good exercise to go through. Long-term forecasts give entrepreneurs the chance to think about their business from a 20,000-foot view, and explain where they see the business headed in the future.

Bill offers a great exercise and template for thinking about and reviewing your forecast from a critical perspective.

Forecasting Tool and Exercise

Create an operating budget with forecasts for each month of the upcoming year. Extend to quarterly for the next two years. Then create an annual forecast for year four and year five.

Download: Forecast Example (PDF)

Once you’ve filled this out, evaluate your forecast as a team. Assign individuals to take the roles of optimist, pessimist, and realist. Look for downside risks and upside opportunities.

See Bill explain the exercise here. 

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