Excel-Induced Hallucinations
FP&A Excel models contain more fiction than a Stephen King novel
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Hallucinations
We are all familiar with AI hallucinations - where AI generates incorrect/misleading information and presents it as fact.
But we neglect to realize the magnitude of the lies we tell ourselves (human hallucinations)
I have worked with LOTS of companies (in my full-time roles and as an advisor). VC-backed companies are particularly delusional when it comes to forecasting.
My company is going to IPO (reality is <1% of startups will IPO)
We will reaccelerate growth (and be top decile)
AI won’t disrupt us
Our moat is more durable
Churn will significantly improve next year
Building a financial model that incorporates all these things is NOT hard. Any Excel monkey can build what your overly optimistic CEO wants. That’s the easy part.
Is being delusional about forecasts bad?
There is a delicate balance.
Too conservative means you sacrifice revenue growth in order to be more efficient. While your efficiency and cash position are better today, your competition might be passing you and becoming a bigger problem tomorrow.
Too aggressive means inefficiency increases, cash runway likely shrinks, and optionality decreases. While you may have maximized your growth potential today, your future options become more limiting because of a smaller cash balance. Even for those with an endless supply of capital, options still become more limited because of the impact of continually fundraising.
Companies need just the right amount of “crazy”. It’s the CFO’s (and other leaders) job to balance this acceptable level of crazy.
The Excel-Induced Hallucination
One of the Excel models that creates the greatest “Excel-induced hallucinations” is the sales capacity model as this is the starting point for the entire annual planning process.
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The reason why this particular model generates so much fiction (more than most Stephen King novels :) is because of how much attention its output gets from investors, potential investors, the company, etc.
Everyone wants to be a top decile company. Those are the only ones raising money right now. And what does it take to be top decile? REALLY fast revenue growth.
How do we go from $5M of ARR in 2025 to $25M in 2026?
Excel Monkey: Easy! All you need to do is hire about 30 more sales reps before next year so you have the sales capacity to hit those targets.
Experienced (truthful) Executive: Wait…that would mean we have to go from 6 sales reps to nearly 40 sales reps in less than 8 months. And then we would need to hire all the other GTM functions that support those reps. And it implies we would have zero sales rep attrition (and lose their ramped sales capacity). And, and, and….
Maybe the company can go from $5M to $25M, but don’t let all of the critical assumptions get hidden in your pretty little Excel model. The best way to hit big targets is to have the team fully understand the underlying assumptions and what they all must do to achieve it.
Final Thoughts
Whether forecasting in Excel or some fancy software/AI tool you need to do the following:
Understand all the drivers and assumptions underneath the plan
Make sure the plan is achievable. Stretch targets are great but make sure it is reasonably possible even if everything has to be nearly perfect.
Understand the buffer for error in the plan
Make sure your team (particularly leadership) understands the plan AND is bought into the plan
Be quick to change the plan/forecasts when things change
Do NOT live in Excel-induced hallucinations too long.
Footnotes:
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