Good News Makes Me Nervous

I have a slightly inconvenient habit in Finance.

When the numbers are bad, I ask questions.

When the numbers are good, I ask more questions.

Revenue is $800,000 ahead of forecast?

Great.

Why?

Gross margin improved three points?

Wonderful.

What happened?

Cash collections suddenly accelerated?

Now I’m suspicious.

This is probably not the personality trait my family would choose to highlight about me. My husband has spent years watching me receive perfectly good news and immediately begin looking for the small door marked potential disaster.

Finance just gave this tendency a respectable career.

But there’s a reason I’m suspicious of good news.

Bad news gets investigated.

Good news gets congratulated.

And sometimes that’s exactly how the next forecast miss gets started.

The $800,000 question

Imagine we’re sitting in a monthly business review and revenue comes in $800,000 above forecast.

There’s usually a brief moment when everyone is happy.

Sales had a great month. The business beat the plan. Someone might even point out that Finance was too conservative.

Fine.

But I want to know where the $800,000 came from.

Did we win business we weren’t expecting?

Did an existing customer expand?

Did something scheduled for next month close early?

Did implementation happen faster than expected?

Was there a pricing benefit?

Was there an assumption in the forecast that was simply wrong?

Those answers describe very different businesses.

If customers are expanding faster than we expected, I may want to revisit the rest of the year.

If $500,000 of next month’s revenue arrived early, I probably shouldn’t.

Same favorable variance.

Completely different information.

That distinction matters because the job isn’t to explain why the number is green.

The job is to understand what the green number is telling us.

A beat can borrow from the future

Timing is one of the first places I look when something comes in unexpectedly favorable.

A big customer signs earlier.

A shipment moves.

A project gets completed.

A payment arrives.

An expense doesn’t.

Everything looks wonderful.

Sometimes it is wonderful.

Other times we’ve simply moved something across a calendar.

That becomes especially important during forecasting because businesses have a natural tendency to treat upside as evidence and downside as an exception.

Revenue arrives early and suddenly we’re discussing whether the full-year forecast should go up.

Revenue slips and we’re explaining why it’ll definitely arrive next month.

You can probably see where this goes.

If we’re going to change our view of the future, I want to understand whether something about the business actually changed.

The calendar changing isn’t always the same thing.

I’m especially suspicious of margin improvement

Revenue gets most of the attention, but unexpected margin improvement can be even more interesting.

If gross margin jumps, I want to understand the mechanics.

Did pricing improve?

Did product mix change?

Did input costs decline?

Did utilization improve?

Did we become more efficient?

Or did an expense land somewhere we weren’t expecting?

There is a large difference between:

“Margins improved because the business is operating better.”

and

“Margins improved because something hasn’t hit the P&L yet.”

Both can produce a very attractive chart.

Only one necessarily deserves a victory lap.

This is where FP&A earns its seat in the conversation.

Not by being the person who refuses to celebrate anything.

Nobody wants to work with that person.

The value is being able to distinguish between a result and a signal.

Favorable variances deserve variance analysis too

Most finance organizations have a deeply ingrained response to misses.

Actual is below plan.

Investigate.

Find the driver.

Talk to the business.

Explain the variance.

Update the forecast.

Actual is above plan?

Nice job, everyone.

Next slide.

I’ve never completely understood that.

A favorable variance is still telling us our expectation of the business differed from reality.

That should make us curious.

Maybe we underestimated demand.

Maybe our pricing assumptions were wrong.

Maybe Sales changed behavior.

Maybe a productivity initiative is actually working.

Maybe customers are paying faster because something changed in collections.

Those aren’t merely explanations for why we beat a number.

They’re information we can use.

And occasionally the good variance reveals something more important than the bad one.

The question isn’t “Was it good?”

When I’m looking at an unexpected favorable result, I usually want to sort it mentally into a few buckets.

Was it structural?

Something about the business may genuinely have improved. Pricing, retention, productivity, conversion, customer behavior, operating leverage.

If so, we should understand it well enough to determine whether our assumptions about the future need to change.

Was it timing?

Nothing fundamental changed. Something simply happened earlier or later than expected.

Important to understand, but probably not a reason to rewrite the year.

Was it a one-off?

A large deal. A settlement. A temporary cost benefit. Something real, but not something I’d build into the next twelve months.

Or were we simply wrong?

I think Finance occasionally has trouble with this one.

Sometimes there isn’t an elegant business explanation.

Our assumption was bad.

That’s useful information too.

I’d rather discover that an assumption doesn’t hold than spend three months defending it because it happens to live in the official forecast.

This is where forecasting gets interesting

A forecast isn’t valuable because it predicts every number correctly.

It won’t.

What makes it valuable is that it forces us to make our assumptions about the business visible.

We think customers will buy at this rate.

We think headcount will grow at this pace.

We think margins will behave this way.

We think collections will take this long.

Then reality shows up and starts arguing with us.

That’s the interesting part.

Every variance is new information about the business.

The mistake is treating favorable variances as proof that things are going well and unfavorable variances as problems requiring investigation.

Both are evidence.

Both can expose weak assumptions.

Both can change what we believe happens next.

Sometimes good news is actually good news

I should probably make this clear before I ruin everyone’s next monthly review.

Sometimes the business just had a great month.

Sales executed.

Operations improved.

Customers paid.

Margins expanded.

People did good work and the numbers reflected it.

Celebrate it.

I’m not suggesting Finance sit in the corner waiting to explain why happiness is premature.

But after the celebration, I still want to understand what happened.

Because if something worked, I want to know whether we can do it again.

That’s the part of favorable variance analysis I think gets overlooked.

Investigating good news isn’t pessimism.

It’s how you figure out whether good performance was luck, timing, or something the business actually learned how to do better.

And if it’s the last one, that’s worth considerably more than beating the forecast once.

So yes, good news still makes me a little nervous.

My husband would probably tell you that’s just my personality.

He may be right.

Finance has simply provided me with enough spreadsheets to make it look professional.