How much will you spend on groceries next month?

Sometimes founders assume that if a financial forecast is good, it will predict the future with 100% accuracy – and when I tell them that it will be off, they get a bit frustrated. “What’s the point then?” is a question I’ve been asked a handful of times. Let me answer it with an example.

How much money will you spend on groceries next month? No, seriously – think of a number.

Now imagine that you’re revisiting this number a month later, when you can compare it with how much you actually spent. How good was your estimate?

I’d bet it was more-or-less correct. Maybe you were off by 20% either way, maybe even 30%. But you probably weren’t off by ten times. I bet you didn’t expect to spend £400 on groceries and somehow ended up spending £4,000 - or £40,000. Your guess wasn’t perfect, but it was good enough.

Knowing that your grocery bill will be about £400 next month, you can make some other decisions. You’ll know how much will be left over for non-essentials. You’ll be able to decide whether now is the time to put something in your emergency fund.

It’s the same with your company’s financial model. No model will correctly predict the future down to the decimal point. But a good one will be good enough to give you some very helpful info.

Love and cash flow,

Jana