EFFECTIVE FINANCIAL FORECASTING DEVELOP THE CAPABILITIES NECESSARY TO ANTICIPATE BUSINESS OUTCOMES

Global Finance 360 | Copyright 2010 | All Rights Reserved 1

Global Finance 360

“Prediction is very difficult, especially if it's about the future." --Nils Bohr, Nobel laureate in Physics

Predicting the future has never been easy. And in today’s dynamic and global environment, it’s harder than ever. Yet despite the difficulties, an effective forecasting process is essential to properly managing a company. Numerous stakeholders, both internally and externally, depend on the forecast to evaluate the health and direction of the company.

Despite the importance of an effective forecasting process, many companies continue to struggle with a process that is highly manual and time-consuming, and that yields information that is often inaccurate and quickly obsolete.

There are various challenges that contribute to forecasting difficulty:

Management Expectations: Most management teams like detail and forecasting is no exception. Most forecasts are far too detailed, creating a lack of focus on the key drivers that “move the needle” on revenue and profitability. A large amount of detail in the forecast requires more information, and turns into a data collection exercise instead of focusing on the insights produced by the forecasting process.

Data Management: The monthly close cycle of many companies prohibits the timely collection of data. Additionally, the level of granularity provided by the accounting process is often inconsistent with the forecasting requirements of management. Finally, quality operational data is required to understand the drivers of revenue and cost, yet this is exactly the type of data that is difficult to retrieve from a company’s information systems.

Disconnects Between Forecasts: Companies have multiple forecasts. Sales, Operations, Marketing and Finance all have different forecasts with different models, assumptions and time horizons. When there is a disconnect between the various groups, it is virtually guaranteed that the financial forecast will be inaccurate.

Technology: Despite the millions of dollars invested in enterprise technology, many companies still rely on Excel spreadsheets to collect, consolidate and report forecasts. This leads to a highly manual effort that requires substantial time. The use of spreadsheets makes multiple updates of the forecast difficult and error prone.

Organizational Culture: All too often managers are castigated for producing results below forecast. As a result, managers are tempted to “game the system” by forecasting on the low end of expectations with the hope of ending above expectations at month-end. This can lead to deliberately inaccurate forecasts.

”Accurate

forecasting is

not an option for

companies today

– it is an

imperative.

Companies must

transform their

forecasting

process to

effectively

execute strategy,

manage

organizational

resources, and

communicate

expected results

with internal and

external

stakeholders.”

Author: Stephen G. Lynch

Global Finance 360 | Copyright 2010 | All Rights Reserved 2

About Global Finance 360

Global Finance 360 covers the world of corporate finance and accounting and how these activities are impacted by globalization. Focus areas include Finance Delivery Strategy, Shared Services, Business Process Outsourcing, Process Improvement and Organizational Design.

Global Finance 360 is run by Steve Lynch. Mr. Lynch is a Principal in the Finance Transformation practice of a global consulting company. He is responsible for the marketing, sales and delivery of Finance Transformation services in North America and serves as a key liaison for his company’s global Finance practice. He brings more than 15 years of experience advising global companies on their service delivery strategies and has served over 60 clients in a variety of industries including consumer product and industrial manufacturing, aerospace & defense, transportation, technology, entertainment and financial services. He has also served as a Controller in private industry and as an auditor in public accounting.

Mr. Lynch is an active content contributor on the topics of Finance Transformation and globalization and has presented at various forums including the IQPC Shared Services & Outsourcing conference. He can be found on the web at www.globalfinance360.com.

Contact Information:

Steve Lynch

Toll-free: +1.800.216.2512

Office: +1.719.481.2599 1042 W. Baptist Road Suite 194 Colorado Springs, CO 80921

slynch@globalfinance360.com www.globalfinance360.com

Building a Better Forecast

Given the challenges of forecasting and its importance to organizational management, companies must find better ways to manage forecasting. Fortunately, leading companies are finding ways to make the insights from the forecasting process more meaningful. Listed below are five steps a company can take to transform the forecasting process:

• Integrate Forecasts: The financial forecast will never be accurate if it is developed independently of other forecasts. Line items in the financial forecast should have direct ties to forecasts and planning assumptions made by Sales and Operations. All groups should be using a common set of drivers and assumptions regarding the economic outlook and the expected demand for the company’s products or services. A key benefit will be increased communication between departments.

• Leverage Technology: Performance Management is one area that has lagged in the area of technology investments and integration. An effective forecasting process will have an application dedicated to the planning and performance management process to enable web-based data entry and automated roll-ups based on the reporting structure.

• Reduce the Level of Detail: Most forecasts could benefit by dramatically reducing the level of detail. Every forecast should minimize the level of detail needed to forecast revenue and profitability. Attention should be paid to those key line items that drive changes in the forecast.

• Implement Rolling Forecasts: Business events do not follow the artificial distinction of a fiscal year end. An effective forecasting process uses a rolling forecast to project beyond the current fiscal year. Six quarters is typical but it can vary by company and industry.

• Drive Cultural Change: Ultimately senior management will set the tone for the forecasting process. If managers know they are going to face a backlash for telling the truth, they will continue to game the system and submit unrealistic forecasts. An environment must be created where there is an incentive to create accurate forecasts and where managers have the political support to do so.

Conclusion

By following these best practices, companies will be able to reduce the time and effort required to develop a useable forecast. With improved forecasting, companies will have an effective tool for executing strategy, allocating resources and communicating expected results with key stakeholders.