How FP&A Analysts lead top-down revenue forecasting
Image by Miguel A. Amutio via Unsplash
Accurately predicting sales can be tricky in volatile times. But if you follow the correct process, it becomes doable:
You’ll need to consider all significant internal factors that the company can (to some extent) control. At the same time, you mustn’t forget to consider external factors. Finally, every detailed forecast includes scenario planning. That’s because it enables you to manage uncertainty and risk.
By having a range of outcomes, the company can prepare contingency plans, which allows them to respond quickly to a changing environment. As FP&A Analyst, you don’t need to have all the answers. But it’s your job to lead the forecasting process. That means you need to guide the cross-functional team by asking the right questions.
To create a thorough top-down revenue forecast, discuss these questions:
Internal Business Drivers:
➣ How are we delivering against current strategic objectives? Are we exceeding expectations, or are we behind?
➣ Why are we ahead or behind expectations?
➣ On a high level, what are we planning to do differently in the coming months?
➣ What are we planning to do the same way as in previous months?
➣ What are the significant drivers we can influence to grow our business? How do we expect them to change, given our strategy?
A few examples:
a) Advertising (amount and short- versus long-term focus)
b) Promotions
c) Sales headcount
d) Product innovations
e) Geographic expansion
f) Pricing
g) Inorganic growth (Mergers & Acquisitions)
External Factors:
➣ Is the macro-environment this year in line with expectations?
a) Inflation
b) Market growth
c) Competitor’s performance
d) Political factors
e) Regulatory factors
f) Availability of resources (raw materials, talent, etc.)
➣ Why is the macro-environment different from expectations?
➣ How do we expect each of these factors to change in the coming months?
➣ How certain are we that each external factor will develop how we think?
Scenario Planning:
➣ What would be the results of a “do-nothing-different” scenario?
➣ What would be the outcome if all risks materialize?
➣ What’s an aggressive, optimistic-leaning, but still feasible result?
➣ What could be the result if we had no resource constraints?
Remember, to create a best-in-class top-down revenue forecast:
1️⃣ Lead the process by asking the right questions
2️⃣ Consider internal business drivers and external factors
3️⃣ Create a range of possible outcomes via scenario planning
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