Fundamentals of forecasting

© COPYRIGHT EmergeONE Ltd 2020
Fifteen minute ﬁnance for founders
Fundamentals of Forecasting
and budgeting basics

Intro

Why are we here today?
● To share some knowledge and learn something
(hopefully) new!
● To understand the importance of forecasting
and budgeting for you as you scale
● To give you some simple tools and tips that
you can use in your venture
● To demystify the dark art of finance (yes,
art, not science!)

● Forecasts are the road map, in numbers for your
venture.
● Budgets help you, and your team, manage costs and
measure progress.
● They provide information both internally and
externally that aid in decision making.
Why forecasting and budgeting matter

Why EmergeONE?

I’m Aarish, I’ve spent the last 15
years working in SMEs in some of the
toughest environments in the world
(yes, including London!).
For the last 5 years, I, and now the
EmergeONE team, have been working
with startups, investors, founders
and others to help ventures grow.
Our team have collectively raised
10s of millions, and we have helped
our clients grow their businesses,
raise debt and equity capital from
angels and institutional investors
and navigate the tough times that
come as you scale.

What We’re Going
to Talk About

The Basics - What’s the difference between a forecast and a
budget and when should you be using one or the other.
Forecasting - What to input, what to output and where to
focus.
Budgeting - Why bother? (And who to rope in)
Ways to Build a Budget - Top Down, Bottom Up, Rolling,
Negotiated, Stretched, Zero based...
Keeping it Simple - Ways to take some of the pain out of
budgeting.
Questions?

”It is not necessary to do
extraordinary things to get
extraordinary results.”
– Warren Buffett

Forecasting v
Budgeting

Budgets
Budgets are a tactical
tool typically used to
set the short term plan
for the venture,
negotiate targets for top
line and structure
departmental spending
criteria. They help a
business manage in the
moment.
So what’s the difference?
Forecasts
A forecast is a strategic
tool that looks forward
over a (typically long)
period of time and helps
internal and external
users of the data to make
decisions - be it
investment, resource
allocation or business
direction.

So, when the heck do I use them?
Scenario Forecast Budget
Mainly Internal ⛌ ✔
Long Term (>1 Year) ✔ ⛌
Multi-Scenario ✔ ⛌
Set Targets ✔ ✔
Manage Costs ⛌ ✔
Raise Investment ✔ ⛌
Present to Board ⛌ ✔

Forecasting

“...you cannot run around the terrain
without a f*****g map and expect to go
anywhere good.”
The Map and the Terrain
by Ben Horowitz

Cash Flow
Where money is
coming from,
and where it’s
being spent.
Movements on
the other
statements,
stripping out
non cash
items.
A Quick refresher on Financial statements
Balance Sheet
A snapshot of
the financial
health of your
business -
right now.
Assets,
liabilities
and equity
Income
Statement
Gives a
picture of how
your business
is performing,
over time.
Interplay of
revenue, and
costs.

Forecasting fundamentals
Right, now that we know when we
should be building a forecast,
let’s figure out how to build it.
I’m going to focus on the
methodology rather than the Excel
or Sheets flow but I’ll touch on
some dos and don’ts along the way.
Remember - your forecast is a
representation of your business in
numbers, if it isn’t a proxy to
reality, it’s not going to make
sense.
1
Discover
Understand Purpose
Decide Outputs
Gather Data
Design
Structure Inputs
Design Outputs
Create Ranges
2
Build
Create Back End
Link to Outputs
Check Integrity
3
Refine
Calibrate Inputs
Add Graphics
Review Outputs
4

Before you
dive into your
spreadsheet,
the first step
to any good
model is the
discovery
phase - no
different to
building out a
product.
Discover What do we know?
What do we want to know?
Who’s it for?
What will they want to see?
What assumptions are we testing?
Who needs to provide me info?
?
?
?
?
?

I’m less
concerned
about what
colours or
fonts you use
here.
Rather this is
about good
practice in
how you
tabulate and
present info.
Design
Do Don’t
Focus on revenue drivers - these are
the hardest to model
Overcomplicate, if you have 2 channels,
include 2, not 5
Distinguish Inputs from Outputs Try and put everything on one page
Build timeline granularity Live Link external data
Separate out different input tables Build a balance sheet if you don’t need
it
Ensure you include funded and unfunded
cash balances
Underestimate costs, err on side of
caution

Building out the back end
of any forecast is really
the most critical and time
consuming parts, and
rightly so.
If you’re not an Excel or
Google Sheets whizz it’s
best to keep it as simple
as possible, but if the
forecast requires some
complex formulas - get
help!
Build
● Work through the build methodically.
● Use ‘Named Ranges’ if you know how so you can
audit more easily.
● Try and build in checks to the forecast where
possible.
● Where possible break formulas, even if that
means more rows.
● Separate tabs for each calc that feeds into
outputs
● Test as you go.

Input Table -
Named Range =
‘User_Inputs’
Levers
Checks Index formula
to gather data
from input
table
Output
Table

Sales have reduced the pipe
What happens if we increase CAC?
When do we get to cash surplus?
Finally, once
you are happy
that your
forecast is
built
correctly,
refine the
inputs to get
to the ‘right’
set of
outputs.
REﬁne We’re launching a new channel,
do we have data?
Runway seems tight, is opex
optimised?
? ? ?
?
?

Budgeting basics

I feel that your ambitions should always
exceed the budget.
Guillermo del Toro

So Why Bother with Budgeting?
When you’re operating under
uncertainty, budgeting may seem a
little futile - especially at the
very early stages of a venture.
So let’s stop calling it a budget
and start calling it a plan - just
that subtle repositioning should
help highlight its importance.
And while at early stage you can
get away with a relatively simple
process and plan, as you start
scaling both the process and the
output become more important.
Benefits of Budgeting
Build a plan
Allocate short term resources
Set targets / OKRs
Measure performance
Improve decision making
Forces longer term thinking
Tests assumptions
Identifies Gaps

Different ways to budget
Methodology Characteristic
Top-Down Here’s the budget, follow it.
Bottom-Up Tell us what you’re looking for and we’ll see.
Negotiated Let’s work out what’s needed together.
Rolling Always looking 12 months ahead.
Stretch So you can deliver a top line of X? Let’s make
it X++.
Zero Based I know you hired them last year, but what’s the
justification to keep them this year?

Budget Buddies Growth:
Founders and
senior team,
prepared by
finance
Bottom Up
Scale:
Budget Holders,
coordinated by
finance, signed off
by senior team
Negotiated
Startup / Early
Stage:
Founders with
support from
external /
internal finance
Top Down

4
Allocate
3
What do we
need?
2
What do we
have?
1
Set Objectives

Reporting the right numbers
Current Quarter Previous Quarter Plan Delta Delta Delta Delta
Q3 2020 Q2 2020 Q3 2020 Plan Plan % QoQ QoQ %
Gross Sales 240,161 224,185 269,022 (28,862) -10.73% 15,976 7.13%
Net Revenue 47,792 53,266 64,565 (16,773) -25.98% (5,474) -10.28%
% Rev / GMV 19.90% 23.76% 24.00% -4.10% -17.08% -3.86% -16.25%
Contribution 26,286 31,033 38,739 (12,454) -32.15% (4,747) -15.30%
Contribution % 55.00% 58.26% 60.00% -5.00% -8.33% -3.26% -5.60%
Total Overheads 82,342 75,943 91,132 (8,790) -9.65% 6,399 8.43%
EBITDA (56,056) (44,910) (52,393) (3,664) 6.99% (11,146) 24.82%
EBITDA % -23.34% -20.03% -19.48% -3.87% 19.85% -3.31% 16.52%
Key
Financials
Actuals Plan Variance

Tips
Budgeting takes
time, don’t leave
it to the last
minute.
If you need buy
in, get buy in,
demotivation is a
killer.
Don’t start with
sales and budget
your expenses to
meet them.
Instead, fix your
expenses and
stretch your
sales.
Make sure your
budget categories
mirror how you
report.

Tips
If you have multiple
departments, use Google
Sheets:
○ Create a template.
○ Send a separate file
to each department.
○ Use Index function
to pull them into
your master budget.
Growth ventures
should review and
adjust regularly,
not just every
year.
Understand why
variances are
happening,
question them and
course correct.

Bringing it
together

Context is everything,
numbers sometimes
only tell part of the
story!

What’s the purpose?
Who’s going to use it?
What do we know and where’s the data?
How far out should we go?
Who needs to be involved?
Build iteratively.
Come back to it often.
That’s a wrap

Questions?

Thanks for listening!
https://www.linkedin.com/in/adsinuk
@adsinuk
aarish@emergeone.co.uk
Contact me (Aarish Shah)
EmergeONE
https://www.linkedin.com/company/emergeone
@EmergeONE_UK
www.emergeone.co.uk

Fundamentals of forecasting

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