Oh, how many times have I wished for a crystal ball in my business! Will we close the deal? What if I run out of cash? Will this be the year I put our business on a new trajectory? But alas, all we can do is put one foot in front of the other and hope we are prioritizing the things that really matter in driving our business forward. There is one tool that’s very underutilized by business owners and their accounting teams: the Accounting Waterfall. It may be the best tool to give business owners visibility on how they’re tracking on revenue, expenses, cash flow, and operating metrics. And it’s the closest thing to a financial crystal ball.
The Current Situation
For those of you building your budget at the beginning of the year, it tends to be static. You build the budget, hope it’s right, look at how your actual performance varies from it on a monthly basis, and move on. I don’t see many companies dynamically revisiting their forecast and adjusting during the year as they learn more and gather input. The limitations of the current situation are:
- Your forecast is limited to the information you had when you put it together originally
- You may be comparing it to actuals but don’t have a means to act on it strategically
- The budget is sitting in a spreadsheet and the work to export financial statements is a bit of a pain
What is the Accounting Waterfall?
The Accounting Waterfall is an easy (dare I say, fun?) way to track your actual performance vs. your budgeted operating plan. It allows you to see how your year is tracking and adjust your forecast quickly and easily as you gather more knowledge in developing your strategy. Here is how it works:
Step 1: Create the Waterfall Matrix. Start with Revenue.
The waterfall matrix has the months of the year as both columns and rows. The green band at the top is where you input your original operating plan (e.g. what you expect to do in revenue for the calendar year).
Step 2: Begin Tracking
Below you will see we have actual data now, all the way through February. Actuals for the month go into the yellow boxes. The remainder of the row is the forecast for future months. But here is where it gets really cool: every month is another month to re-assess the forecast.
Step 3: Assess and Re-Assess the Forecast
Notice that in January, revenue was lower than the Operating Plan by $2,176. However, we chose not to change the forecasts. You can see for 2019, we’re projecting $1,287,252 for the year vs. the original $1,289,428 from the Operating Plan. But now in February, you see that revenue was $107,166, which was also off the Operating Plan.
I sit down with my management team and we decide we need to re-forecast 2019. Demand is just a little bit soft and we know there’s a supply problem given the trade tariffs. So, you will see in the row for February, I now modified March through July. The 2019 projection is now $1,273,332 (the two actual months of January + February + the remaining forecasted months March-December).
Step 4: Instill the Discipline
Every month is a new month to look forward and analyze how the year may perform. Meet with your team to review the results in this format to get key inputs and learnings that may impact it. The key is to use the Accounting Waterfall to meet consistently with your team and assess. Now, at the end of the year, you will see that we ended at $1,2848,828, which is only $4,600 less than our Operating Plan. Great work! Note how we also chose not to make any forecast adjustments after February.
Step 5: Apply to Major Income Statement, Balance Sheet, Cash Flow and Metrics
Now, you can take the Accounting Waterfall structure we applied to revenue and apply it to any other line item you want to manage and forecast. Break it down to a level where you can easily hand it off to a team member that can be responsible for keeping it updated and. Here are some additional examples of where you can apply this methodology:
Payroll and Wages
Cash Flow from Operations
Sales Qualified Leads
The Accounting Waterfall is the closest structure I have found to giving me visibility into my business’s future. It’s easy, dynamic, fun and most important, understandable by all. Give it a try!
At Stride, we can work with you to set up your Accounting Waterfall for your business and manage your back office bookkeeping and accounting so the right numbers are going to the right places, consistently and efficiently. Please Contact Us if we can help.