This article explains how accounting and corporate planning teams should improve the accuracy of year-end forecasts and establish disclosure processes to avoid downward revisions to earnings forecasts during the first year after listing.
For companies that have completed an IPO, the risk of revising earnings forecasts downward during the first year can become a serious event, turning the stock market’s expectations into disappointment. Heads of accounting and corporate planning are required to take practical steps to eliminate overly optimistic forecasts from business divisions, produce accurate year-end forecasts and make appropriate disclosures.
The background to downward revisions faced by newly listed companies lies in the gap between growth-focused plans developed during the listing preparation process and actual operating impediments, such as unexpected competition, the loss of major contracts and delays in hiring. Companies that lack mechanisms to identify and correct these gaps at an early stage are more likely to face the risk of falling short of forecasts just before the fiscal year-end.
Building an accurate year-end forecast requires the accounting and corporate planning functions to adjust sales figures submitted by business divisions rather than adopting them as provided. By dividing the sales pipeline into phases, applying conversion rates and setting discount rates based on results from the past several quarters, companies can improve the accuracy of their expected amounts.
By having accounting and corporate planning lead the operation of a monthly rolling forecast, companies can eliminate subjective judgments from the business front lines and continuously improve the accuracy of their outlook.