Quick Insight
When we make a forecast, it’s likely optimistic. Future results will likely be below it. Pick a more pessimistic scenario as your baseline forecast. Now, model an even more pessimistic scenario. You now probably now have a much more realistic range of outcomes to prepare for.
We are all naturally overconfident and overoptimistic. Of course, I’m certain in my belief of this.
This can cause huge planning mistakes. Our forecasts and plans are optimistic. We know there’s lots of uncertainty to our forecast, so we run a scenario where things go better than forecast (the “optimistic scenario”) and one where they go worse (the “pessimistic scenario”).
That’s standard practice at many companies. However, if we know our baseline forecast is inherently optimistic, we shouldn’t stop there. We must adjust for our biases.
Our forecast is likely optimistic, so future results will likely be below it. It may be as poor as the pessimistic scenario. For simplicity, use the pessimistic scenario as your baseline forecast. Now, model an even more pessimistic scenario.
You now probably have a much more realistic range of outcomes to prepare for. Your budget or baseline forecast is adjusted for your inherent optimism.
- Rob Stephens
Founder of CFO Perspective and the Finance and Strategy Toolkit (FAST)
Further Insight
CFO Perspective Resources
Get all the CFO Perspective resources with a FAST (Finance and Strategy Toolkit) membership.