Whether you’re focused on raising capital, meeting venture capital expectations, completing clinical trials, or meeting other milestones, medical device companies need to predict and plan for the future, taking time to develop and constantly improve a realistic forecast model.
Forecasting Insights from a Medical Device Perspective with Tryton Medical’s Brett Farabaugh
Throughout this interview series, I’ve interviewed experts to share various forecasting best practices, tips, and advice. In my first article I chatted with Tim DeBone, director of finance and operations at Windsor Circle. In my most recent article, we continued the conversation with Dave Neal, co-founder of The Startup Factory, advisor, angel investor, and CFO.
To provide further insights on forecasting best practices, I’ve interviewed Brett Farabaugh, CFO at Tryton Medical, Inc. Farabaugh has a diverse background working with public and private entrepreneurial companies after starting his career at Pricewaterhouse Cooper. His experience includes financial management, analysis and reporting, initial public offerings and other exit strategies, investment and acquisition due diligence, and fundraising.
He shared the following forecasting best practices:
What are the benefits to developing a realistic bottoms-up forecast model?
It’s important to have a bottoms-up model because then you can more accurately determine what you’re expecting for results. You can also more easily identify variances when the actuals are known and make decisions real-time. For example, if you have to hire extra “unplanned” headcount in a region, you will know what the true impact will be for cost/benefit analysis. This ability can be particularly useful if you have a forecasting model that’s dynamic and can be adapted.
What are the risks of not having a realistic forecast model?
The biggest risk is that you may not make your forecast and, consequently, you may run out of funding before you achieve your objectives.
When in a company’s life cycle should they develop a realistic forecast model?
It’s important to have a realistic forecast model from day one. Obviously, it’s a little more difficult in the early days and you may be updating your forecast more frequently, but forecasting takes time to perfect, so the earlier you start the better you’re going to get.
How often should a forecast be updated and what are the best practices when reporting your actual results during the year versus your forecasted plan?
Realistically, a younger company is going to update the forecast more often. It just all depends on how dynamic the business is. Obviously, you’re going to update your forecast whenever something significant changes in the business. For a younger company, these updates usually occur at least a couple times a year. For reporting purposes, however, it can be very confusing, so sometimes you may only update your comparisons (or as far as the base forecast you’re comparing to) once a year. It really depends on the size of your operations and how dynamic the business is.
What are your lessons-learned over the years to developing a realistic forecast?
The biggest lesson is really practice makes perfect. Ultimately, it’s difficult the first time you do anything, but the more your acumen progresses on developing the forecast, the better you’ll be. Usually, there is a primary variable that moves a lot of the numbers so over time, with practice and experience you can get a better feel for what that prime variable is and then get a better feel with how to forecast it.
What mistakes or war stories can you share related to forecasting?
There are lots of war stories but essentially the biggest mistakes I’ve seen people make is not using a bottoms-up forecast, but instead relying too much on a top-down forecast. Once this occurs, it can be difficult to clearly understand and explain why there are differences from the forecasts. If you pardon the analogy, if you build a house on sand, it easily collapses in a storm. If you build your forecast on just top-down numbers without the supporting bottom’s up detailed assumptions, then it’s basically going to be only as good as the foundation on which it is built.
What industry specific forecast issues are there?
Well, every industry’s got its own issues, but particularly for the medical device area, one of the biggest challenges is health care regulation and reimbursement. These are changing very rapidly and therefore changing dynamics of the health care industry. As a result, you’ve got an enormous amount of pressure on prices in certain geographies that are very difficult to forecast. Compounding the issue, you also have tremendous regulatory uncertainty working with the FDA and other regulatory bodies. In certain situations, you might be able to forecast what the costs are going to be, but when a study is going to be completed or when an FDA approval is going to be received is largely beyond your control. You can actually see evidence of that our local markets if you look at some of the public companies in the space, where as a delay or an unexpected FDA result can have dramatic impacts on a company’s market value. What advice would you share to new entrepreneurs that plan to raise capital? I would encourage them to not be shy. A lot of times people hesitate to create a bottoms-up forecast because there are so many assumptions. People start to get a feel that these numbers aren’t worth anything because they’re built on a thousand different assumptions. That’s just the nature of forecasting. You’ve got to start somewhere. You’ve got to start your forecast based on something and you’ve got to be able to show reasons for why the numbers come out how they are. So, building those assumptions and building them in a way that if people challenge them, you can have a constructive dialogue on them is essential. Do your best, that’s all you can do. As I mentioned, you have to have someplace to start and a bottoms-up forecast is that place.
Brett Farabaugh’s practical advice clearly points to the value of building a bottoms-up forecast as early as possible in the life of a company to develop a deeper understanding of the business and underlying assumptions that drive it. This knowledge will allow you to develop a realistic financing plan to achieve the planned milestones during the forecast period.