In the face of unprecedented political and economic upheaval, organisations are struggling to get a handle on the future. Despite the wealth of data and technology at their disposal, 50% of organizations are unable to forecast revenue beyond six months, and 60% are unable to forecast revenue to within plus or minus 5%, according to a recent FSN study1 “The Future of Planning, Budgeting and Forecasting”.
When confronted with such volatility, businesses tend to compensate by forecasting more frequently in order to allow for changing market conditions. And while FSN’s research found that this produces some benefits in the short term, continuous planning needs to be complemented with the right technology, the best processes and the most useful data in order to guarantee better visibility into the future.
So, the question is, what do modern finance professionals need to do differently to achieve greater forecasting accuracy and certainty further out into the future?
Historic methods of budgeting and forecasting based on revising the annual budget a couple of times a year can no longer be relied on to support businesses in an uncertain and changeable environment. Instead many organisations are tackling this uncertainty by forecasting constantly, with 73% of organizations in FSN’s survey reporting a move to “continuous planning”.
It’s a move supported by the research. Organisations that have adopted continuous planning are almost twice as likely to be able to forecast earnings between plus or minus 5% compared to those organisations that have yet to adopt this method. And forecasting more often helps to build confidence in the plans. Finance functions that have adopted a culture of continuous planning are three times more likely to report that other business functions have more confidence in the process. Finally, they are also four times more likely to be able to respond more quickly to market change.
Yet, in many cases businesses are building on budgets that are already out of date by simply repeating the existing reforecasting processes more often. This is akin to running on a hamster wheel - organisations are churning out forecasts faster only to find they are still making the same mistakes. So, what do finance professionals need to do to tip the balance in their favour? The research shines a light on three principal areas that can help finance functions raise the quality of their forecasts, namely; moving to rolling forecasts, incorporating non-financial data and moving to a centralised planning platform in the cloud.
Rolling forecasts go some way to providing a more robust and dependable perspective of the future. As the name suggests, rolling forecasts are based on a rolling 12-month time-frame in which plans or budgets are continuously updated by adding on a new accounting period when the earliest accounting period has expired.
But it would be misleading to suggest that the move to rolling forecasts is a mere technical change. Modern finance needs to take account of the cultural shift required to make this work, including the need to involve more stakeholders at the ‘sharp-end’ of the business that can offer a broader perspective than the finance function can do on its own. Indeed, organisations that are benefitting from a culture of continuous planning and forecasting are twice as likely to engage more stakeholders in the process and more than twice as likely to agree that all users have visibility of their plans and changes in real-time.
Pushing the envelope with non-financial data
Still, businesses at the leading edge of best practice do more than just regular reforecasting. Most significantly they incorporate more non-financial data into their forecast and planning models in order to expand visibility and broaden the time horizon. From web analytics to customer satisfaction surveys to supply chain information, the volume and variety of non-financial data is exploding and it can provide crucial visibility.
Where financial indicators look back on previous performance, non-financial indicators are more tightly correlated with future financial performance. FSN’s research found that senior executives who make better use of non-financial data are more than twice as likely to be able to forecast beyond the 12-month horizon.
Leveraging enabling technology
Despite the obvious benefits of better forecasting, many organisations are under-invested in appropriate technology which means they’re unable to take advantage of the benefits that rolling forecasts and non-financial data can confer.
The problem lies in a hodgepodge of scattered data sources, disconnected spreadsheets, multiple data models and a variety of different vendor solutions for reporting, budgeting, planning and forecasting. FSN’s research1 found that only 15.5% of organisations surveyed could reforecast within 24 hours and a further 39% take up to a week. Meanwhile, a significant number (45%) were unable to respond rapidly to change.
An earlier piece of FSN research2 underlined the importance of process standardisation and automation as a pre-requisite for process efficiency, yet few organisations have achieved this for planning, budgeting and forecasting. Moving to the cloud offers the best prospects for rapid standardisation because cloud solutions are immediate, accessible and scalable. Vendors such as LucaNet can offer a streamlined architecture hosted in the cloud (LucaNet Cloud), which enables the organisation to leverage multiple data sources, and allows unlimited numbers of budget holder to have shared visibility of the same business model.
The artificial horizon of the annual budget and attendant forecast revisions act as a brake on forecasting accuracy. By contrast, FSN’s research underlines the importance of increased forecasting frequency; constantly ‘testing the temperature of the water’, formulating scenarios, assessing risk and assigning probabilities. Rolling forecasts, which are constantly updated for the latest corporate and economic developments, are the first step in delivering superior accuracy for businesses facing constant change.
In addition, finance functions at the leading edge of the finance evolution are using new sources of non-financial data to more confidently predict future outcomes.
Ultimately though, reliability and foresight into the future comes from a genuine appreciation of what drives value creation in the business. The availability of budgeting, planning and forecasting solutions like LucaNet, hosted in the Cloud, have ensured that the building blocks for success are in place, now a holistic approach to organisational culture, process and technology is necessary if forecasting is to become consistently more accurate.
Note1 FSN “The Future of Planning, Budgeting & Forecasting Survey” November 2016
Note2 FSN “Future of the Finance Function Survey”, June 2016
About the Author
Gary Simon, is rated by Linkedin as one of the UK’s top 10 business leaders in 2015 and is leader of the FSN Modern Finance Forum on Linkedin with more than 48,000 members. He is a graduate of London University, a Fellow of the Institute of Chartered Accountants in England and Wales and a Fellow of the British Computer Society with more than 30 years’ experience of implementing management and financial reporting systems. He is the author of four books, many product reviews and whitepapers and as a leading authority on the financial systems market is a popular and independent speaker on market developments. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector.
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