The next most common mistake that I see finance teams make is that they try to incorporate ALL of the detail into their model. When they do this, it causes a few problems.
- You end up overfitting your model. Overfitting means that you tune your model to the exact past performance that you saw in the business, but since every quarter is unique, it ends up creating an inaccurate forecast of what will happen in the future.
- The second issue is that adding too much detail to the model makes it difficult to maintain. The model becomes impossible for anyone else to edit, which ends up causing problems if you leave and makes it less usable for the rest of the organization.
- Finally, including too many drivers usually creates an inaccurate forecast. Every driver ends up having some element of human assumption in it. Humans aren't great at predicting the future, so if we add too many of these, then you can find yourself really far off target.
Instead, focus on going deep to understand the full process, figure out which parts of the processes impact the numbers the most, and use those drivers in the model that you create for the business.