Segmenting Down to the Lowest Profitable Level Yields Key Financial Data

Key Takeaways:
  • A rolling forecast tied to key performance indicators can help you make the right business decisions.
  • Segmenting your business by sources of income reveals key financial data.
  • How rolling forecasts strengthen cash flow management.

 

The pace of business today is marked by constant change, including economic volatility, marketplace shifts and technological advancements, among other pressures. To keep pace and ensure your company meets its strategic goals, time-sensitive business decisions must be made to keep the company on track.

A rolling forecast aligned with key performance indicators that is regularly updated at can help confirm that you have the most current company financial and operational data to make better decisions. But equally as important, the data from a rolling forecast provides key financial information to help you manage and predict cash flow. Together, the rolling forecast aligned with key performance indicators and improved cash flow can supercharge your efforts to meet and exceed the goals in your company’s strategic plan.

What is a Rolling Forecast?

A rolling forecast takes a look into the future of your company’s operational and financial performance. You start with the data that exists today, look 12 months into the future, and you keep rolling from month to month, so you always have a 12-month forecast for the business. Some of the factors that go into the forecast are seasonality, production, market trends, your company’s sales trends, and anticipated major events like adding a new product line or increasing efficiency by adding new equipment.  The rolling forecast is your gateway into longer term planning needed for continued success. Our focus today is about the short-term planning involved in the rolling forecast.

A forecast is not a budget. It is a look at the future based on information you have today, and since it is updated frequently at the pace of your business, the data is constantly changing to reflect new trends.

You may create your own rolling forecast or work with an outsourced CFO who can help determine the specific data you need for a meaningful forecast, as well as help you build more data into the forecast as you go along from month to month.

Building a forecast requires a model that can help identify anomalies, both good and bad. Are things better than expected, or worse? Did something happen that changes the forward view for the next 12 months? Is there something that should be in the model that is not in there? Without reliable knowledge for the next 12 months, you’re always explaining why you didn’t know the future.

As you become accustomed to using rolling forecast data in your financial management that aligns with the key performance indicators, you may find that more detailed information about your company’s performance may help develop a more realistic forecast. That’s where cash flow comes in.

Segmentation

The key is to ensure you understand your cash flows based on how you make money. This means looking at your cash flows by measuring cash flows at the lowest level profitable (not possible) – such as by business segment, by customer groups, by product categories, and.

This can be tricky. If you’re trying to manage your business based on the traditional accounting-based income statement and balance sheet, it will be difficult to get to where you need to be. A strategic business consultant or outsourced CFO would take the accounting records — the income statement and the balance sheet — and turn them into dynamic scorecards. This is a lesson in how to take diverse information and understand how the company makes money, and how to synthesize accounting information, operational data and business trends to yield a strong forecast.

A good example can be found in a successful restaurant operation’s beverage sales. A restaurant owner may track revenue by food and beverage sales. But diving deeper and segmenting the beverage sales & profitability into alcoholic and non-alcoholic sales can yield more detailed cash flow results

  • Alcohol sales and non-alcoholic sales provide meaningful data to understand customer trends.
  • Non-alcoholic sales (mocktails – these are mixed drinks that contain no alcohol) are growing in popularity as consumer tastes change. From this information, restaurant owners can decide to add additional mocktails to replace alcohol sales.

For each segment, revenue and profitability tracked over time would show trendlines that can help build an increasingly accurate and detailed rolling forecast. By taking cash flow to a lower level and breaking it down into segments, a business owner gains more insight into how the business really makes money.

Drilling down to the lowest level that is profitable in your cash flow analysis produces rolling forecasts that are more detailed, revealing more trends. This enables a business owner to start making decisions differently and put more resources into the strongest segments.

The Role of Operations

The easy part of this process is to analyze the accounting data. But how do you synthesize the accounting data with operations data to produce a business measure? A business measure must include things that are not financial, but which evince measurable productivity, such as number of hours worked on a manufacturing floor compared with the revenue value of the products produced.

The key is to not go into the measuring and segmenting process with a preconceived notion of proving a certain reality. It’s important to rationally segment your sources of revenue and cash flow data in a way that tells a story about your business. Building a “business scorecard” facilitates incorporating the data into your cash flows, resulting in more relevant, timely available data for the rolling forecast.

How Rolling Forecasts Strengthen Cash Flow Management

Rolling forecasts extend the planning horizon by updating projections on a monthly or quarterly basis. Instead of waiting for an annual budget cycle, you can refresh assumptions using the latest data — sales trends, cost changes, market conditions and operational performance. This creates a living financial model that reflects reality rather than outdated expectations.

Several benefits flow directly from this approach:

  • Earlier indications of cash shortages or surpluses
  • More accurate working capital planning
  • Better alignment between operations and finance
  • Improved scenario planning
  • Faster response to market changes
  • Long term business planning

Questions?

Working with an outsourced CFO on segmenting your sources of income and creating a rolling forecast may help you uncover hidden opportunities and improve your company’s cash flow management. If you are interested in having a conversation, contact an Adams Brown advisor.