Video: What Are the Best Practices to Build a Forecast for Your Startup?
Let’s talk about forecasting best practices, that’s building a three-year model that’s dynamic.
You want your model to easily change assumptions for each year, and you want to include a waterfall throughout the entire sales funnel, that’s going to include conversion rates and unit economics.
This is a best practice that the best CEOs do, because it provides an understanding of resources and effort required to close a sale. You also want to remember to include delays due to sales cycle and customer collections. This is going to affect your cash flows.
Next, you want to stress test your model, conversion rates, growth rates and see what the impacts are. When these start to go sideways, you’re going to be prepared. If not, it can kill your cash. Next, your model should include a balance sheet, income statement, and cash flows. Finally, be honest with yourself in building your model.
I’m going to leave with you with a word of caution from George Box, an influential statistician from the 20th century, he says “All models are wrong, but some are useful.” I hope your model is useful for you!