It's that time.

We're talking about revenue.

That lovely, sweet revenue.

What you all talk about daily and how you measure success with friends.

But we're trying to put some sanity into it with a "truth serum" check.

If you were forwarded this email, my goal is to share one thing each week that changes the way you think about money. Subscribe by ​clicking here​.

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PlanningOS: The Truth Serum

Over the last few months, I’ve been running annual planning processes with all my fractional CFO clients.

Time and again, I’ve heard how enlightening the process has been. One recently told us that our abilityt to force them to step back and look at the big picture was a great complement to the tactical day-to-day work their days usually consisted of.

And this is something I’ve seen consistently.

By taking the time to do this work, you get a new refreshing look at your business.

Today, we’re going to step back and look at revenue, but then spend the rest of the time truly stepping back from stepping back.

Then, next week, we’re going to tie a bow on this process and connect the work we’ve done to KPIs you’re going to track weekly and monthly.

We still have a lot of work to do, but I’m excited about the impact we can (and will) have.

Let’s jump right in.

Step 4: Revenue Forecast

We’ll talk about the revenue forecast next week, as it’s complex enough to need a bit more room.

Once we have the revenue forecast, we may be forced to make the hard decisions about what needs to be cut from the budget if our profits are not as expected.

While the time is short to do a revenue forecast within a budget newsletter, let’s do a high-level breakdown of the process.

1. Run revenue scenarios based on key variables/drivers
2. Combine revenue scenarios into a baseline revenue forecast
3. Create a best and worst-case revenue forecast
4. Run a forecast sanity check

We want to group revenue by category or driver. For some, that’ll be types of revenue. One revenue type may have a certain driver. Another a different one.

I can’t give you an exact formula because all businesses are different. But here are some general variables to consider once you’ve determined your categories:

1. Historical Revenue
2. 12-24 Month Goals
3. Market/Industry Trends
4. Business Growth Rate
5. Committed Revenue
6. Business Capacity

Once you’ve established your categories and the appropriate drivers for your business, split revenue into 3 buckets:

1. Committed or Expected Revenue: based on contracts, historic growth, or known market conditions
2. Growth Potential Revenue: things that might happen but are less than 50-75% likely… the big contract that could swing things, the new customer relationships you’re seeking, etc.
3. New Initiative Revenue

It’s easy to throw everything into one bucket, but this can skew things and have you budgeting on unlikely scenarios. You can find yourself overspending when growth or initiatives don’t go as planned.

By splitting revenues into “certain,” “less certain,” and “dependent” buckets, you can also bucket your expenses that go with those scenarios as well. It also facilitates in the baseline-best-worst scenario planning.

Now that you’ve build your baseline, as well as the best and worst, you need to do some sanity checks. Ask:

1. Is this reasonable?
2. Is this likely?
3. Does this get me to my profitability goal?

We’ll make adjustments to revenue based on these questions and reflections.

I’d encourage you to step back from this process for a day or two to make sure you don’t have blind spots.

Step 5: Adjust, refine, & adjust again

No budget will be right the first time.

The goal with the first pass is to get as many variables crammed in as possible. Then, it’s time to refine.

The budget should be passed back and forth between creators and reviewers for each to digest, provide feedback, and make adjustments.

It’s typically best if you have two or three separate “sittings” with the budget. It’ll help you see it with fresh eyes each time.

We want to ask the same questions we asked in the revenue forecast:

1. Is this reasonable?
2. Is this likely?
3. Does this get me to my profitability goal?

I like to ask budget owners to create a presentation to the appropriate parties with their suggested budget. This allows them to add color to their request.

From that color, the reviewers will mark it up and return it. From there, a follow-up meeting is set to address the adjustments.

If everyone agrees, that’s the end. If not, you might have another round (yuck).

The goal here is to build a process that works well within your organization and culture.

Step 6: Create a Cash Flow Forecast

​Did you download my budget template last week?​

If you did, you may have noticed I had expense frequency and cadence as options.

This will allow you to understand when the dollars are actually being spent. This is especially key in asset tracking, as the spend can be rather large. Purchase a few vehicles and you’ve likely got $100,000+ coming out of the bank (unless you finance it).

By understanding the timing, you can track cash balance over time. You’ll do this with a 3-statement model. I’m working on a template, but have not completed it yet. Give me a bit of time and I’ll share it.

We’ll do a stand-alone newsletter on creating the cash flow forecast when that is ready. But, for it to be useful, you need to collect the data now.

Step 7: Reasonability Testing

Have you noticed we’ve been doing a bit of this throughout the process?

The three questions are simple, but powerful:

1. Is this reasonable?
2. Is this likely?
3. Does this get me to my profitability goal?

By running with these questions through the process, you’re forced into a rhythm of reflection.

Now, we’re going to do it one last time.

This time we’re going to take an extra beat and go through things in different rhythms:

1. Overview
2. Detailed review
3. By responsible party

We want to look for trends, patterns, or things that got overlooked through the process of change.

It’s easy to end up with competing bits and pieces in different areas of the budget and miss these during the process. By taking different types of looks at the data, you’re more likely to surface these inconsistencies.

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Was that helpful? Let me know what you're going to use for your business.

Next week we'll wrap this up by tying the work you've done to KPIs.

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