Where the Rubber Meets the Road

This is the time of year when the rubber meets the road. When budgeting and economic forecasts meet reality. 

You’ve spent months visioning and planning for 2023 and it’s time to put those plans into action, right? Correct.

Will you see immediate results? Probably not.

In my experience, run rate and momentum are the most important things that determine a business’s performance early in the new year. You can have glorious PowerPoint presentations that illustrate a bright, shiny New Year, but if there’s no momentum and your teams haven’t already upskilled and allocated significant resources to the plan, then you’re almost certainly going to face disappointment in Q1.

Unfortunately, I’ve seen it play out over and over where the projected revenue and operating income of a business take off on a “hockey stick” trajectory as the calendar transitions from one year to the next. The reality is that those plans were likely formulated in Q3 of the previous year and have laid dormant in a type of stasis as teams work like mad to finish the year strong to meet the objectives of last year’s objectives—which may or may not be correlated with the new plan.

Leaders hold on to the dream of their forecasts for too long and miss the opportunity to adjust and pivot expectations to meet the reality of current run rates and momentum. The drivers of this behavior typically fall into three categories: ego, conflict avoidance, and cognitive bias (illusion of control, illusion of validity, and optimism bias to name just a few).

This inability or unwillingness to align financial forecasts with economic and structural reality leads to all manner of waste—specifically the emotional waste that comes from the anxiety that builds across the organization when everyone can clearly see the imminent collision between forecast and reality.

Bottom line: If you don’t have momentum in the 4th quarter that feeds momentum going into Q1 and your previous plans aren’t interrelated with the new plan, imagining that things are going to miraculously turn around just because the calendar ticked over to a new year is one of business’s greatest fallacies.

Recommendation 1: Build better financial models and make financial modeling a priority in the standard work of budgets and forecasting. A good financial model will have built in “pressure release valves” that adjust for run rate and momentum. They also are built around input variables that aren’t “hard coded” and are easily adjusted for changing market conditions. This model should use the previous year’s plan as a foundation and benchmark. 

Recommendation 2: Build financial forecasting and modeling expertise in your organization. Credentials from the Financial Modeling Institute can help bridge this skills gap.