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Senior management teams tend to focus on achieving results that will show up on their most current income statements. For weeks on end, significant internal resources are allocated and frequent board meetings are held to formulate explanations for recent earnings or revenue growth.
This focus is understandable. Analysts who cover public companies tie earnings to stock prices. Silicon Valley investors view the last quarter’s growth rate as a key determinant of a growth company’s valuation. But we have found that particularly strong management teams actually spend less time obsessing over the current income statement and more time focusing on a different report: the forecast.
There are several reasons for this. To start, the forecast is a vital tool for value creation. Finance theory points out that the value of an enterprise is the present discounted value of its future cash flows, and the forecast provides a road map for earning those cash flows. The forecast also provides a scorecard to evaluate if strategy is appropriate and effective, and directs attention away from short-term results towards longer-term strategic objectives. Furthermore, the forecast guides actions by providing inputs needed to execute operational initiatives. For example, Pantheon, a Platform-as-a -Service, venture-backed company in San Francisco, where one of us is CFO, traces the difference between realized growth and forecasted range to assumptions about core business drivers and unlocks specific product initiatives. This allows the company to adjust its resource allocation between long-term product investment and shorter-term marketing investment depending on the findings.
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