Long-range forecasting is strategic in nature, linking financial planning to strategy and driving the determination of capital allocation to value-creating activities. This article addresses short-range forecasting, which traditionally has been for the purposes of business performance management.
The COVID-19 pandemic has increased businesses' need for greater frequency of forecasting financial results and monitoring key metrics. Production lines and the supply chains that feed them require increased monitoring to improve planning across all of an organisation's functional areas. A poll conducted during the Association's Agile Finance Reimagined webcast series found that 33% of organisations are forecasting monthly, 26% weekly, and 14% continuously. This has increased workload and stress across all areas of the business, but more so on the FP&A function.
It's challenging to forecast in these uncertain times. Established relationships between underlying business drivers, and assumptions that determine outcomes are no longer valid. This absence of historical established trends, macroeconomic uncertainty, and the constantly changing landscape have made forecasting significantly more challenging. Given the need for heightened responsiveness and the imperative for rapid decision-making, how can finance ensure that the time and effort expended on forecasting is more effective and truly becomes a value-creating activity? Follow this five-step approach:
1. Set clear objectives. Increasing forecast frequency should align with specific business purposes, eg, ensuring adequate production input available for future sales, alignment of staffing to demand, etc.
2. Establish the right level of detail. Use the objectives identified in step one to determine the necessary amount of detail. Forecasting for the purposes of cash liquidity planning does not require a detailed forecast of the P&L by each line item, whereas forecasting supply chain needs will require a detailed breakdown of products and services.
3. Leverage enterprise systems and data. Key drivers and activity data required for forecasting reside in various functional and operational systems. Build data feeds to obtain this information. A digitally connected enterprise enables the finance function to automate and make data more accessible.
4. Leverage sources of rapid frequency data. Use data sources beyond the enterprise, such as geo-positional, weather, demographic, retail, economic, passenger, and traffic data, as proxies for other data that might have been more reliable before the pandemic. The ability to leverage unstructured data, such as voice recordings of customer interactions or customer sentiment expressed on social media, can provide rich insights and forward-looking estimates.
5. Leverage automation and technology. Many finance functions have automated the forecasting process. They've leveraged the availability of a significant volume of data and the technology to ingest, process, digest, and model the outcomes to achieve on-demand or continuous forecasting.
Value is not created in the production of the forecast, but in the deployment of plans and actions that follow. To truly create value from a forecast, it needs to be used to drive decisions that will change and improve business outcomes.
Ash Noah, CPA, FCMA, CGMA, is managing director—Learning, Education, and Development at the Association of International Certified Professional Accountants.