Companies of all sizes are dealing with more complexity than ever before when it comes to budgeting and financial forecasting. With more informed consumers, global markets, and rapidly advancing technologies, it has become exponentially more important to use financial forecasting processes that are more efficient and adaptable to changing business conditions.
A report published by the Business Performance Innovation (BPI) Network, titled “Predictability Through Planning Agility: Best Practices in Collaborative Budgeting and Continuous Business Rebalancing,” points out that higher-performing financial teams are embracing more advanced forecasting processes that employ interactive planning and cloud-based collaboration.
Automated budgeting and forecasting systems, when used in conjunction with financial forecasting best practices, are helping companies save time, reduce costs, avoid errors, and increase the value of their forecast data as a driving force behind their decision making.
Let’s examine seven best practices that can make your financial forecasting procedures more efficient, adaptable, and valuable to your company:
1 Determine If This Particular Forecast Is Worth Your Time and Money
Conducting a financial forecast using formal procedures can be both time consuming and expensive. Before you make the investment, ask yourself if this particular forecast is worth your time and money. Here are a few factors to consider when making this decision:
- Will the results affect your decision making?
- Will a formal forecasting procedure provide more useful insights than your current procedure or rough estimations?
- Can the events be accurately forecasted?
If you answered “no” to any of these questions, then chances are the financial forecast isn’t going to provide any real value to your decision-making processes.
2 Invest in Automation Software
For many organizations, financial forecasting is seen as a non-value added activity because its value to decision makers is far outweighed by its cost. To reverse this perception and make forecasting a value-added activity, we must minimize the cost of the forecasting process and maximize the usefulness of the data produced. Automated Corporate Performance Management (CPM) software can help in both of these efforts.
According to research cited in a recent Proformative webinar, Excel is still the most popular tool used by companies to meet their Corporate Planning requirements, however, over the last two years, there has been a gradual transition toward cloud-based CPM solutions. Cloud-based software allows financial teams to collaborate in real time, making the forecasting process more efficient and, in turn, less expensive and cumbersome.
New CPM software is available with adaptive financial models whose parameters are revised automatically with the input of new information. When integrated into your existing business systems, these adaptive models provide faster insights and reduce manual errors associated with human-controlled Excel spreadsheets.
You can find a comparative analysis of various project management and budgeting strategic planning software here.
3 Enhance Cooperation by Linking Your Strategic, Operating, and Financial Planning Teams
Far too many organizations separate their financial planning team from their strategic planning and operating teams. Effective financial forecasting is a collaborative effort, and combining these resources will help you optimize the forecasting model and adapt it to changing business conditions.
When circumstances change in the external or internal environment, your organization should respond by adjusting the strategic, operating, and financial plans. Knowing how and where those plans interact will help you adapt quickly to new KPIs and business objectives, and rechart a course that is beneficial for all stakeholders.
4 Adjust Your Historical Data for Systematic and Unsystematic Events
You can improve the accuracy of your financial forecasts by adjusting your historical data for systematic and unsystematic events. Systematic events include holidays, changing seasons, and other predictable occurrences that affect your data. Unsystematic events are unpredictable occurrences—for example, a natural disaster that adversely affected your sales.
5 Forecast Business Performance Drivers
Driver-based-budgeting and planning should be the norm in today’s rapid passed business environment. Although historical data will play a key role in your budgeting and financial forecasts, don’t forget to consider potential changes in business performance drivers. How might pending legislation affect your labor cost? Will a new technology affect consumer demand or your supply chain? Evaluating the various “what if” scenarios and developing contingency plans is a key principle of financial forecasting.
6 Keep It Simple
“AMONG COMPETING HYPOTHESES, THE ONE WITH THE FEWEST ASSUMPTIONS SHOULD BE SELECTED.”
— WILLIAM OF OCKHAM
This problem-solving principle, known as Ockham’s razor or the “law of parsimony,” has become a prominent guide in the development of theoretical financial models. When choosing among forecasting methods, lend your preference to the simplest approach unless there is evidence that a more complex approach would be better.
Use few variables rather than many variables, unless it is warranted, and use simple relationships rather than complex ones. This approach will improve accuracy, reduce mistakes, and minimize costs.
7 Seek Feedback about Forecasting Methods
Financial forecasting is a complicated process. There are hundreds of principles to consider when developing a forecasting model, and one small oversight could compromise the accuracy of the data produced. Likewise, any improvements in your process could increase the value of the data in your decision-making processes. It is important, then, that you consider hiring an expert to evaluate the integrity of your forecasting methods.
Adaptability and Efficiency Are the Cornerstones of Financial Forecasting
These tips are not intended to be a step-by-step guide to financial forecasting—any attempt to create such a guide would be a futile exercise since each organization is so unique. Your employees, vendors, supply chain, and technologies are particular to your enterprise, and those factors will certainly set your forecasting models apart from other businesses’.
What these seven best practices will do, though, is help you speed up the forecasting process, save money, and enhance the adaptability of your forecasting model. In doing so, these practices will make financial forecasting a value-added exercise for your company while improving the accuracy of the data produced.