(Gary Simon is chief executive of FSN Publishing Ltd. and leader of the FSN Modern Finance Forum for CFOs on LinkedIn.)
With the geo-political and economic landscape changing literally at the speed of Twitter, it is unsurprising that organisations are struggling to get a handle on the future. A recent FSN study, “The Future of Planning, Budgeting and Forecasting,” highlighted that despite the wealth of data and technology at their disposal, 50 percent of finance organisations are unable to forecast revenue beyond the six-month time horizon, and 60 percent are unable to forecast revenue to within plus-or-minus five percent.
When confronting such volatility, businesses naturally tend to forecast more frequently to get better certainty around market conditions. And while FSN’s research finds that this certainly produces benefits in the short term, it does not guarantee better visibility into the future.
What does today’s finance function need to do differently to combat uncertainty and more confidently predict future performance?
Growing business uncertainty coupled with an inability to look beyond a six-month horizon raises considerable concerns for the accuracy and integrity of business planning. Historic methods of budgeting and forecasting, based on revising the annual budget a couple of times a year, can no longer support business needs. One way around this is to reforecast more frequently, and indeed, 73 percent of organisations have reported a move to a culture of continuous planning over the last three years.
It’s a view that is supported by the FSN research. For example, organisations that have adopted continuous planning are almost twice as likely to be able to forecast earnings between plus-or-minus five percent compared to those organisations that have yet to adopt continuous planning.
Furthermore, 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, continuous planning on its own is not enough to combat uncertainty. In many cases businesses are simply repeating poorly executed processes, building on budgets that are already out of date.
To make an analogy, forecasting more frequently is a bit like running faster on a treadmill—you are working harder without advancing.
So, what do finance professionals need to do to tip the balance in their favour? The FSN research shines a light on three principal areas that can help finance functions combat uncertainty: Moving to rolling forecasts, incorporating non-financial data, and moving to a unified platform in the cloud.
Organisations that have adopted continuous planning are almost twice as likely to be able to forecast earnings between plus-or-minus five percent.
Rolling forecasts are based on a 12-month time frame in which plans or budgets are continuously updated when the earliest accounting period has expired. This is very different from the traditional re-forecast made at quarterly intervals. The rolling forecast always looks out 12 months in advance. Quarterly reforecasts become less forward-looking as time passes: the first quarter looks out nine months, the second six months, and the final quarter just three months, as if business grinds to a halt at the end of the year.
It would be misleading to suggest that the move to a rolling forecast is a mere accounting change. Finance needs to take account of the cultural shift needed to make this work, including the need to involve more stakeholders at the customer-focused “sharp end” of the business who can offer a broader perspective than the finance function can on its own. Indeed, the FSN study states that organisations that are benefiting 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 into their plans and changes in real-time.
However, businesses at the leading edge of best practice do more than rolling forecasts. Most significantly incorporate more non-financial data to extend the planning/forecasting horizon. The volume and variety of non-financial data is exploding and it can provide crucial visibility that allows organisations to look beyond the uncertainty of the short-term. From web analytics to customer satisfaction surveys to supply chain information, non-financial indicators are more tightly correlated with future financial performance. FSN’s research found that that senior executives who make better use of non-financial data as part of their planning regime are more than twice as likely to be able to forecast beyond the 12-month horizon.
Many organisations are sadly under-invested in appropriate technology and not able to take advantage of the benefits that rolling forecasts and non-financial data can confer. For example, our research found that only 15.5 percent can reforecast within 24 hours and a further 39 percent take up to a week. So, a significant number (55 percent) are unable to respond rapidly to change.
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, and planning and forecasting. Historically, finance and workforce planning reside in multiple systems and silos of spreadsheets that require finance, HR, and business leaders to spend their precious time on manual calculations to ensure data integrity, rather than on analysis and driving business outcomes. In most cases this is compounded by a marked disconnect between budgeting systems and the underlying financial transactions from which they are derived.
By contrast, vendors such as Workday provide a unique environment in which financial and operational data derived from granular transaction data can be combined into a single planning environment. This means that FP&A professionals can model the entire business and leverage transactions within a single system, and the resulting budgets and projections are written back seamlessly to the transactional system for operational and management reporting.
A unified environment also confers organisational advantages. Traditionally, organisations have built up their budgets, plans, and forecasts along functional lines. But business processes do not respect functional boundaries, and plans in one area need to be consistent with projections in another if resources are to be allocated efficiently, and if satisfying a performance objective in one place is not to have unforeseen consequences in another. For example, a revenue plan in a professional services organisation, such as a law firm, must be consistent with the HR plan and financial plan to ensure that there are sufficient lawyers available to produce the projected billable hours. Planning in lock step recognises the vital importance of these interrelationships and provides the enabling technologies which allow different functional areas to collaborate during the planning cycle.
Having budgeting and planning in the same technology stack and dataset as financials and HR enables cross-functional planning while at the same time helping to reduce costs and increase speed of reaction. Continuous planning happens in real-time, with data that the entire organisation can trust.
Improving reliability and the ability to see out further into the future comes from a genuine appreciation of what drives value creation in the business and a willingness to focus on forecast accuracy. Finance functions at the leading edge are using new sources of financial and non-financial data in combination to more confidently predict future outcomes. Smart CFOs know that a holistic approach to organisational culture, process and technology, coupled with a shift to continuous planning (preferably rolling forecasts) is finance’s best weapon against uncertainty.