Why 5?Posted on Jul 12, 2018 9:10:00 AM
From time to time, curious clients and prospects ask us about our corporate name…Forecast5™. They essentially want to know how we came up with the name and “what does it mean”? The answer is pretty simple. It is a word play on our core mission and products. Our focus is helping local governments develop smart “5 year financial forecasts”. The next question is usually, “Why a 5 year financial forecast versus some other increment of time”? It is a good question, and here is our answer…
In evaluating budgetary plans, five years provides a good balance between the known and unknown. Historically, the public sector has adopted five years as a prudent length of time for budget forecasting, and we agree with this perspective.
There are many local governments that develop and maintain five year forecasts as a normal, but not required, course of business. In recent years, however, some national and state discussions have considered requiring local governments to submit five year forecasts as part of their annual financial reports. In Ohio, schools have been submitting updated five year forecasts to their regulator every six months. The Governmental Accounting Standards Board (GASB) has recently contemplated five year financial projections reporting as a new requirement for “GASB compliance”. And, as another example, recently proposed legislation in New York would have all schools submit five year financial plans to their Department of Education.
Stating the obvious, Forecast5 recommends this type of planning and reporting as a best practice for the public sector. Putting a forecast together does require time, effort and resources. However, the benefits of a forecast far outweigh the costs in terms of strategic planning, governance, and stakeholder communication. Learn about our budgeting and forecasting solution 5Cast™ here.
Back to the question of “Why 5?” A forecast done for less than five years may not capture the full impact of financial compounding on decisions and strategies that are being considered. And on the other hand, an analysis that goes out farther than five years can potentially bring in too many unknowns. Looking at revenues, a five year window may actually stretch the limits of prognostication depending on the consistency of the sources of revenue. On the expense side of a projection, five years can be projected easily since most of the expenses in a local government are salaries and benefits for employees.
In many cases, the first three years of a well-executed financial forecast will be very accurate in terms of projected ending cash balances. Inherent in the assumptions process, the fourth and fifth years may not be as accurate in terms of projected balances. However, there is tremendous value in the direction in which years 4 and 5 point. A projection of declining balances is symptomatic of structural deficits.
In the case of an identified structural deficit, the benefit of the five year forecast is that it provides an early warning and an opportunity to execute a course correction plan. In almost every case, it is less painful to make small corrections years in advance, than it is to try to fix in a single year a problem that has been caused over several years.
Local governments that are consistently executing five year forecasts are putting themselves in the best position to make informed decisions…and to be able to maintain service levels to their stakeholders and communities. What is your five year forecast telling you?
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Mike English is a founder and the CEO/President of Forecast5 Analytics, Inc. – a technology company focused on software development and data analytics for the public sector. Mike has spent his entire career concentrating on the development of financial and strategic solutions for schools and municipalities. Forecast5 is headquartered in Naperville, Illinois – a suburb 30 miles west of Chicago.