We’re living in a time of great political and economic uncertainty. Britain’s decision to leave the European Union sent global financial markets into a spin, and we saw the pound plunge to its lowest level in more than 30 years. The shifting political landscape on the other side of the Atlantic has also injected a level of uncertainty for businesses. How will these political, social, and economic forces combine to influence financial and tax regulations, trade agreements with other nations, and the ability to operate on a global scale?
For businesses across the globe, this uncertainty creates a degree of trepidation, and for those involved in the business of finance, it means becoming clairvoyant as well as being the person responsible for balancing the books and making short-term predictions. Finance leaders are working hard to get a handle on the future, even with the wealth of big data and analytics now available. In fact, recent research suggests that 50 percent of organizations are unable to forecast revenue beyond six months, and 60 percent are unable to forecast revenue to within plus or minus 5 percent.
Whenever uncertainty strikes and nerves take hold in the C-suite, businesses counter by planning more and increasing the frequency of their forecasts. The “what about now?” approach to forecasting may be a short-term cure for executive nerves, but financial planning can only give visibility into the future if it is driven by real-time data from the right stakeholders.
Businesses that have adopted continuous planning claim to be almost twice as likely as their peers who haven’t done so to accurately forecast earnings between plus or minus 5 percent.
When I think back to how some of the leading organizations in the world have traditionally approached forecasting, I conjure up images of anxious-looking men and women in grey suits pulling together piles of paper as they make revision after revision to the annual budget. Because market volatility and uncertainty don’t tend to provide businesses with advance warning, an annual budget can be rendered obsolete in a matter of weeks. And it’s not just unexpected political occurrences which can impact forecasting. The global business landscape is littered with examples of disruptive events which have caught organizations off guard.
Given this, it’s hardly surprising that 73 percent of finance leaders surveyed in late 2016 said they have moved to “continuous planning,” to be able to revise and rework forecast predictions in line with business and market changes. The benefits speak for themselves, with businesses that have adopted continuous planning claiming to be almost twice as likely as their peers who haven’t done so to accurately forecast earnings between plus or minus 5 percent.
Adopting a continuous approach to financial planning also breeds credibility within the organization, with respondents to the same survey three times more likely to report increased stakeholder confidence. The icing on the cake is that finance leaders stated that a continuous approach meant they were four times more likely to be able to respond more quickly to disruption in their market.
Not all current approaches to forecasting meet these standards, and many organizations are re-running forecasting on budgets that are already out of date—a recipe for inaccurate data and reporting mistakes.
Here are three key areas that finance professionals can focus on to improve the quality of their planning and forecasting.
While better forecasting is the CFO’s number one weapon against uncertainty, the real world includes plenty of non-financial data, something that has been difficult to include in the past.
Consider labor costs, often an organization’s largest area of spend. Accurately forecasting labor costs depends on understanding a staffing model made up of non-financial data—who, what, where, when, and how. Historically, this data and the systems that produce and manage them have been separate, leaving finance managers little choice but to plan with the only data they had—financial results.
Including non-financial data in the forecasting mix can give an extended look into the future. Where financial indicators provide a look in the rear-view mirror, non-financial data can deliver greater insight into future performance. FSN research also found that senior executives who make better use of non-financial data are more than twice as likely to be able to forecast beyond a 12-month horizon.
Having the right data to create better forecasts is vital, but having the ability to respond quickly to changes and revise plans is equally important. Organizations need to embrace continuous planning, a model that brings in more stakeholders and more cultural context from relevant parts of the business. It’s about engaging stakeholders and ensuring they all have visibility into plans and subsequent changes in real-time. Shifting from an annual forecast to a rolling model can help the business react more quickly to changes and ensure the rest of the organization has visibility into these changes.
While the benefits of continuous planning may seem obvious, it is only possible if your business has technology capable of bringing together rolling forecasts and non-financial data. The unfortunate truth is that it probably doesn’t. My colleagues Mark Nittler and Betsy Bland have been fairly vocal about the lack of financial transformation and the importance of the right technology foundation. Times are changing, with innovative CFOs leading the charge.
Executives who make better use of non-financial data are more than twice as likely to be able to forecast beyond a 12-month horizon.
The main barrier remains finance teams using legacy tools from a mixture of vendors, with poorly integrated data sources across multiple data models that rely heavily on the dark arts and a degree of luck to bring reporting, planning, budgeting, and forecasting together. In other words, the very glue that holds of all these disparate systems together is the thing actually preventing operational agility. Businesses need to rethink the fundamentals of their technology.
The shift to the cloud is an opportunity and catalyst for real business change, rather than simply running poor or outdated processes on a new technology model.
The world we live in does not align itself well with the fixed nature of the annual budget cycle, where continual revisions merely deteriorate forecasting accuracy. By contrast, continuous planning underpinned by rolling forecasts, solid planning, and incorporating both financial and non-financial data is a fundamental step on the road to creating a finance function that can confidently predict future business outcomes in a less-than-certain world.
Until someone finds a crystal ball, it’s those who can respond quickest who will succeed, and the finance function is perfectly placed to lead this evolution.