1. Skipped steps
These are the forecasting non-believers — the CFOs who think a detailed budgeting exercise (combined with monthly reporting) is sufficient enough. The finance team only undertakes forecasting sporadically, or in a reactive manner — when the numbers really don’t match up to budgeting expectations. They’re skipping steps but expecting a successful result.
What these CFOs may not realize is that though budgeting and forecasting are distinct entities, one doesn’t work well without the other. They are part of a symbiotic relationship. In business-speak, we call it an integrated budgeting and forecasting process. The budgeting cycle should begin toward the end of the summer, with finalization in December. The forecasting, which should minimally begin now (at quarter’s end) and then again (minimally) at each quarter end, not only measures against budgetary expectations, but it also feeds into next year’s strategic budget planning.
2. The devil’s (not) in the details
Minding the details is a cardinal rule of business. Forecasting may be the lone exception to that rule. In a forecasting effort, more details aren’t better, they’re worse. They:
- Require such a significant time and resource investment that they discourage a quarterly/ongoing process
- Create an inefficient, delayed timeline
- Impact actionability by obscuring the big picture learnings
Good forecasting usually follows the 80/20 rule, which estimates that 20% of a company’s drivers are responsible for 80% of the company’s results. In which case, if the finance team focuses forecasting efforts on the 20%, its forecasts will not only be more digestible, but certainly more timely and likely more accurate.
3. It’s a duet, not a solo; but only finance is singing
The forecast should be a joint business-finance creation. Too often, finance is dictating, not participating.
The reasons for that may be two-fold. It may be that finance feels territorial over the output or process, in which case finance will have won the ownership battle only to lose the accuracy war. There’s never been an accurate forecast that hasn’t been informed by the risk and opportunity, revenue optimization, and management insights of the business teams. Business teams have their eyes and ears closest to the action. They are key stakeholders in the process and outputs.
Or it may be that finance’s ownership is by default — business units push back on joint forecasting development, fearing a prolonged investment of time and resources. It’s a rational fear; the forecasting process is often unwieldy and inefficient.
Here, it is finance’s job to transform the forecasting approach: redesign the timeline, the scope, and the process to make it less burdensome on the business (which, as a bonus, also makes it more accurate in its outcome). Finance might also emphasize to business partners the conflict-free nature of the forecasting process (relative to budgeting), given the absence of compensation implications.
4. Data talks: is finance listening?
We’re in in the middle of a data revolution, and yet we often see companies ignoring real-time metrics in favor of historical data. Or, we see companies consumed by the explosion of data, unsure of which metrics best inform forecasting projections.
Good forecasts turn data into information and then into insight. But, to complete that transition, the finance team needs to identify, leverage, and integrate the right data sets and ignore the superfluous ones. There needs to be the right balance of internal metrics (visibility into revenue, market share, customer drivers) and external metrics (understanding of sector, macroeconomic tailwinds, competition) to forecast with enhanced accuracy.
5. An unstacked tech stack
Finance leaders must build forecasts using that above data categories that go well beyond traditional financial inputs — starting with financials, but also blending in operating metrics as well as macro-economic factors including leading and lagging indicators.
Without the right tech stack to support it, that’s not a difficult task, it’s an impossible one. And the best CFOs do more than tech-enabled quarterly financial. The best CFOs use a combination of the three input categories (financial, operating, macro-economic) for more frequent dynamic forecasting.
The problem is CFOs often lack the right tech stack to support that forecasting
effort. There are three planning-centric technologies critical to forecasting. These are the systems that, together, enhance visibility, allowing stakeholders to quickly identify underperformance variances and assess their root causes.
- The ERP System: The ERP system handles the standard accounting records (such as the general ledger and balance sheet), generates financial reports, and handles related transactions (such as invoicing and expense reporting). This system also commonly supports profitability analysis and revenue management. If we were to leverage an automotive analogy, the ERP is the engine in the car; it makes everything run.
- Data Analytics/Reporting Platforms: Here we are talking about data warehousing, data lakes, data marts with business intelligence for (self-service) data exploration and analytics. This is the dashboard; it tells the driver point-in-time information.
- A CPM Solution: A suite of technology tools, specifically those that focus on the digital enablement of finance (including close and consolidation, budgeting, forecasting, strategic modeling, and financial reporting functions). CPM complements ERP solutions and analytical reporting environments. A CPM solution is the GPS; it understands where the driver is going and helps them get there efficiently while re-routing for unforeseen obstacles.
As the forecast season ramps up, the pressure on PE-backed CFOs to deliver accurate, timely projections only intensifies — especially in the face of economic volatility. Just like with your bracket where upsets can happen at any moment, the unpredictability of business requires CFOs to be agile and proactive. By avoiding the five forecasting (red) flags and embracing the right processes and tools, finance teams can turn chaos into clarity.