|
This feature is included with
How value rules forecast the Profit & Loss
A value rule is the method used to forecast a Profit & Loss amount.
Value rules can be set on Profit & Loss accounts with the following classifications:
|
Profit & Loss accounts of other classifications are forecast differently.
📝 Note: Need to reclassify an account? You can do so in the Company Settings.
Create a new or edit an existing value rule
When deciding how your forecast is calculated, you can set specific rules for individual accounts, all accounts under a heading, or all accounts within a classification.
|
When you create or edit a value rule, you have the option to Add a note. You can type a brief note explaining the assumptions behind your choice of rule.
The assumptions note can be seen by others working on the forecast, so they understand why the value rule was chosen. You can also opt to include the note in a report on the forecast, allowing stakeholders to understand and have confidence in the forecast.
Set up value rules quickly
To set up your Profit & Loss baseline forecast more quickly, we recommend setting a value rule for each classification that will be used by the majority of accounts in that classification. Then, override the rule for any outlier accounts or headings by setting a new value rule.
Example: A business set a value rule for all of their 'Expense' accounts. The business wants to forecast a few specific expenses differently, so they go to those individual accounts and override the classification rule by setting a new rule for each account.
📝 Note: When setting a value rule for a heading, the rule will be applied to all accounts underneath that heading, not to the heading itself.
Ensure your forecast values align with your actuals
You can scroll to the left in the forecasting main grid to view actuals. Periods in light grey show historical or actual figures imported from your source accounting system.
📝 Note: Need to adjust your actuals' values before your forecast because your books haven't closed yet? You can make adjustments in the Company Settings. You can also roll back the forecast starting month.
Types of value rules
When you set a value rule, you have several options to choose from:
Value rule | How it calculates the P&L |
You can type values into the cells of the forecast. | |
Use the values from a previous period as future forecast values.
You can also have an account grow or decrease by a constant amount or percentage. | |
Calculate future months based on the trends of previous periods. | |
Enter a constant value for an account or accounts.
You can also have an account grow or decrease by a constant amount or percentage. | |
Use a formula builder to create a custom forecast calculation.
You can also use data or metrics from outside of your financials in your calculations. | |
Bring the values you’ve budgeted for future months into your forecast.
|
Direct Entry
If you want to simply enter figures for a forecast, you can double-click on a cell and type in a number. If you type in an amount into a cell, it will override any value rules currently used to calculate that cell.
Example: Directors' salaries are fixed each month, but in December, they receive a bonus. The business accounts for the bonuses in the forecast by manually entering the December value, which includes the bonus.
Link to Previous Period
You can select to use the financials from last month, last quarter, or last year as your future forecast.
You also have the option to take the previous period’s figures and add an increase or decrease, either as a percentage or a currency amount. Depending on the prior period you choose, you can add a yearly, quarterly, or monthly increase or decrease.
Example: A business expects its Sales to resemble last year's figures with a 5% increase. They use the 'Link to Previous Period' rule, basing it on the prior 12 months with a 5% uplift applied.
Example: A business assumes travel to events and conferences will occur at similar times as in previous years. They forecast their 'Travel Expenses' account with the 'Link to Previous Period' rule.
Smart Prediction
While the ‘Link to previous period’ rule allows you to use a prior period’s exact figures with an optional increase or decrease, Smart Prediction enables you to base your future forecast on trends from prior periods.
Linear regression determines the line of best fit based on the previous 3, 6, 12, or 24 months of actual data. Then, it bases the forecast figures on that line of best fit.
If you use the Average option instead of Linear regression, Fathom will base the future forecast figure on the rolling average for the past 3, 6, 12, or 24 months of actuals. You can also add a percentage or currency amount increase or decrease to the rolling average.
Example (Linear Regression): Forecasting a 'Repairs and Maintenance' account can be tricky because you often do not know which period they'll land in. However, they may be likely to increase at a similar pace each year.
Example (Linear Regression): A business's Revenue has fluctuated over the past year. The business is uncertain about which future months will be up or down, but believes revenue should continue growing at the same overall rate.
Example (Average): 'Office Supplies' are often forecast for the year based on last year's spend with some uplift. You can average last year's spend and add a percentage increase to it. That amount will be allocated evenly across the year.
Should I use linear regression or the rolling average?
When deciding which Smart Prediction option to use, it’s important to consider:
Significant outlier periods
By finding the line of best fit, linear regression is inherently less influenced by periods of outlier data when compared with the rolling average. However, it is more influenced by recent data when establishing a growth trend or line of best fit.
You can potentially limit the range of actual data you’re using to exclude earlier outlier periods (e.g. base the rolling average on the previous 6 months instead of 12 months). However, if you don't want to limit your data range, then linear regression is a better option for mitigating the impact of outlier periods that are not as recent.
Growth trend or average
If you use the Average, then Fathom will calculate the average value for the included periods and set that as the forecast figure for all future periods. You can include a growth trend with the Average by adding an increase or decrease to the rolling average.
Linear regression calculates the slope of the line of best fit and continues that trend into the forecast period. Therefore, linear regression will always inherently have an increase or decrease based on the slope included in the forecast period.
Constant / Growing
To set a constant figure for future periods, you can use the Constant/Growing rule and enter a value.
If desired, you can add a monthly, quarterly, or yearly increase or decrease to the initial value.
Example: A business pays a constant rental fee each month. They use a Constant/Growing rule to enter the monthly rental fee. Each year, their rent increases by about 2%, so they include a 2% yearly increase as part of the Constant/Growing rule.
Formula/Driver
The Formula/Drivers value rule enables you to create custom formulas to calculate the forecast values of your Profit & Loss.
You can use any chart of account line items, subtotals, headings, drivers, or typed values to build formulas.
Drivers can be set up from the Fathom main grid. They are factors or metrics outside of the Chart of Accounts that influence your forecast. You can learn more about importing drivers into Fathom to use in your forecast calculations from our ‘Import forecast drivers’ article.
You can still create a custom formula value rule without using drivers as variables.
With a Formula/Driver value rule, you can:
Base the performance of one account on another
You can forecast accounts as a percentage of other accounts in your forecast, such as forecasting Cost of Sales as a percentage of Revenue.
Example: A company knows its ‘Materials’ expense account trends at 35% of its Sales. This can be represented in the forecast by building out the following formula for the 'Materials' account:
‘Sales’ x .35
💡Smart Tip: You can turn on account codes to help you differentiate between accounts and headings when building a formula value rule.
Use data outside of the financials to calculate your forecast
Example 1: Some common forecast drivers include ‘Number of Units Sold’ and ‘Average Sales Price’. Using a formula, you would be able to reference these drivers to forecast sales according to the following formula:
‘Number of Units Sold’ x ‘Average Sales Price’
Example 2: In the example of a coffee shop, the data for the number of 'Hot Coffee Purchases’ and ‘Iced Coffee Purchases’ could be entered into the Drivers Grid. Additionally, drivers for the ‘Average Price per Hot Coffee’ and ‘Average Price per Iced Coffee’ could be imported. Then, using a ‘Formula/Driver’ value rule, the Sales account could be calculated according to the following formula:
(‘Hot Coffee Purchases’ x ‘Average Price of Hot Coffee’) + (‘Iced Coffee Purchases’ x ‘Average Price of Iced Coffee’)
You can learn more about what drivers are and how to import them into Fathom from our ‘Import forecast drivers’ article.
Link to Budget
If you want to base your forecast on your budget, you can use the Link to Budget value rule to bring your budget data into your forecast.
If you’ve imported a budget into Fathom, Fathom will take the budgeted figures for forecast periods and put them into your forecast.
Example: A business has meticulously budgeted most of its expenses for the next year. They use the ‘Link to Budget’ value rule to forecast their Expense classification. The budget figures for all their expense accounts are brought into the forecast. For any Expense accounts they don’t want to use the budget for, they create a separate value rule.
📝 Note: If you have imported divisional budgets for a Xero or QuickBooks Online company, only the company total for the budget will be brought into the forecast with the Link to Budget value rule.
Common Questions
Can you have multiple value rules on an account?
You can have different value rules on the same account at different times. This is useful if you want to change how an account is forecast based on the data you have.
When you select a cell to apply a value rule, that cell is the start date of the rule. Therefore, you can change the value rule on an account for any future period.
Example: You've budgeted the next year of Expenses, but have not budgeted beyond that. You use the ‘Link to Budget’ value rule for your Expense accounts for the next financial year. At the end of the next financial year, you switch to using the average calculated with Smart Prediction, along with a percentage increase because you expect Expenses to increase due to inflation.
Why is the rule changed for other accounts when I'm editing the value rule?
If you change a value rule and the change impacts more accounts than you expect, you’ve probably edited an existing rule instead of creating a new value rule.
If multiple accounts use the same value rule, editing that rule will affect how all accounts using it are calculated. You can tell which accounts are using a value rule when you hover over the editing option. Accounts and periods using that rule will be highlighted in green,
To ensure you’re only changing the value rule for the account, heading, or classification you selected, choose the option to create a new rule instead of editing an existing rule.
How do you include seasonality in your forecast?
There are a few ways to incorporate seasonality into your Profit & Loss forecast. You can:
How you forecast the Profit & Loss can directly impact your Cash, Accounts Receivable/Accounts Payable, Prepaid Expenses/Unearned Revenue, because of timing profiles. So, incorporating seasonality into your Profit & Loss will automatically incorporate it into the forecast for your Balance Sheet and Cash Flow Statement.
Use previous periods
If seasonality is reflected in your actuals, the ‘Link to previous period’ value rule will automatically bring that seasonality into your forecast.
Seasonality in Smart Prediction
If you base your Smart Prediction calculation on the last 12 or 24 months of actuals, you can turn on the option to include seasonal adjustments.
With seasonal adjustments enabled, the linear regression or rolling average calculations will automatically account for seasonality and incorporate it into the forecast for the account(s) using that value rule.
Linear regression seasonality
Seasonality is based on prior periods and the extent to which they deviated from the line of best fit. With 12 or 24 months of data, Fathom calculates each month's typical variation from the trendline and incorporates this variation into the forecast for that month.
Average seasonality
If you select the option to include seasonality and base the average on only the previous 12 months of data, the forecast will display the values from the prior 12 months instead of the average. If 24 months of data are used, Fathom will calculate a month's average based on the prior two periods of that month.
Example:
Forecast for April 2026 = (April 2024's actuals + April 2025 actuals) / 2
Seasonality in Formula/Drivers
If you’ve imported or entered drivers with seasonality (e.g. expected sales), that seasonality will be included in any custom formula value rules with those drivers as variables.
Why is the value rule I chose forecasting 0 values for future periods? They should have negative values.
By default, the option to ‘Allow negative values’ is unchecked for a value rule. If you want to enable negative values on an account:
|
Next steps
🎉Congratulations on taking a significant step in forecasting the baseline of your Profit & Loss!
If you’re following our ‘Forecast the Profit & Loss' workflow, you should be ready to start forecasting the Balance Sheet:
Learn more