Five Plays for Intelligent Financial Forecasting

Is your budget a chore you complete once a year, or an asset that you consult regularly and use to course correct as conditions change or new trends emerge?

Intelligent Financial Forecasting

In today’s dynamic business environment, it’s important to keep close tabs on business performance.  We passionately believe that every organization will reap significant benefits by comparing their forecasts to actuals on a monthly (or even weekly) basis, especially now that technology makes that far more doable. When forecasts are updated with accurate data on a regular basis, organizations can be more assertive in their assumptions.

Here I have outlined five forecasting challenges and provided key aspects to consider as well as best practices for implementing intelligent financial forecasting within your organization.

#1 Rolling Forecasting

Predicting unforeseen trends and opportunities 12 or 18 months in advance is difficult in the best cases and nearly impossible when the market or your industry is experiencing uncertainty or volatility. That’s why it’s worth considering a shift to a rolling forecast (also known as a rolling planning system). A rolling financial forecast allows you to project out as the year progresses to accommodate trends that affect key business drivers.

Key considerations:

• Agility & flexibility
  Rolling financial forecasts allow managers to identify and exploit trends and opportunities and make quick decisions on a more operational level. This assumes they are using a budgeting software program that is collaborative at the operational level.
• Continuous planning
  The ability to set up a good year-round system for planning is another key factor. Depending on how your organization is structured, a new cycle of planning could mean that financial forecasting is set to monthly sessions when data is updated and evaluated based on key business drivers.
• Know your key drivers
  Successful rolling forecasts focus on the core drivers for the business, rather than the minutia. This is critical since a rolling forecast can quickly become unwieldy, even with a dedicated budgeting tool.

Best Practices:

• Avoid Excel
  Excel isn’t powerful or sophisticated enough to generate the information you’ll need to perform rolling quarterly forecasts accurately.
• Plan for your duration
  Determine up front the duration of your forecasts (how long the forecast should be) and when a new period should be added.
• Know your drivers
  Successful rolling forecasts are driver based. Identify key business drivers, how to measure them and what to track before you begin.

#2 Forecasting for Balance Sheets

Few CFOs take the time to forecast their balance sheets, preferring to rely on their P&Ls to monitor their cash levels. Granted, forecasting a balance sheet is a difficult task and nearly impossible to do in Excel. But we believe it’s an exercise worth doing as the balance sheet provides critical details that you could easily miss in your P&L.

Key Considerations:

• Deferred Revenue
  If you sell products or services that must be recognized over the period that the contract states, it’s important to look at your deferred revenue monthly to ensure it’s not too high. By forecasting your balance sheet, you can identify when your deferred revenue is too high, and course correct.
• Accounts Receivables
  Liabilities must be considered for accurate forecasts. The expenses you incurred in June may come to $50K, but you may not be required to pay that full amount right away.
• Accuracy
  Forecasting a balance sheet accurately depends on the accuracy of the income statement forecast. If you overestimate sales in a given budget period, your balance sheet forecast will be off as well. You can increase the accuracy of your balance sheet forecasts by limiting how far ahead you look.

Best Practices:

• Find an automated budgeting tool
  It’s difficult to forecast a balance sheet using a spreadsheet, there are too many moving parts. We recommend using a budgeting tool that allows you to forecast your entire chart of accounts and gain insight into much more useful data than just the revenue and expense forecast.
• Forecast monthly
  If you rework your forecast right after month-end close, you can quickly and effectively analyze your actuals against the budget data. This allows you to make quick decisions that will impact the organization’s future performance.
• Do a Sensitivity Analysis
  Determine the best way to book your actuals. For instance, experiment with sales and expenses within your P&L to see how they flow through to the balance sheet. This exercise will help you make better and more accurate decisions.

#3 Forecasting for Cash Flow & Income Statements 

We wish we had a nickel for every management team that believed their companies were on target for achieving their business goals but ran out of cash before they could meet them. There is only one way to avoid this situation: forecast your cash flow.

Key Considerations:

• Poor resources 
  Robust data is essential for accurate forecasting, but you need the proper tools and resources to both manage and monitor it. An intelligent budgeting and forecasting solution will allow you to draw data instantaneously from accounts to provide a more accurate picture.
• Lack of communication
  A common cause of poor cash flow accuracy can be traced to a lack of communication. Each department may have its own systems for collecting and predicting cash flow, each of which may produce entirely different outcomes. Eliminating silos between stakeholders will deliver better results.
• Forecasting methodology
  A lack of a standard system or methodology for data collection, analysis and reporting will affect forecasting effectiveness. Appointing a specific group to put a standard system in place for cash flow forecasting will ensure future accuracy.

Best Practices:

• Plan for seasonality
  Many businesses will see their cash ebb and flow during different points of the year. Investigate reporting from previous years to identify predictable cash flow swings that span a full year (not just a quarter).
• Evaluate fixed & variable costs 
  Evaluate these costs every year or six months. Often, a handful of these costs can be reduced by re-negotiating a contract or making slight adjustments to the budget. These potential savings can have a positive overall impact on cash flow.
• Plan out scenarios 
  Being effective at cash flow forecasting means doing what you can to mitigate uncertainty over the long run, that’s where planning out multiple scenarios can come into play. An easy way for you to approach this is to take your current sales forecast and then project the numbers with 10% more sales and 10% fewer sales.

#4 Forecasting for Workforce Expenses

The largest part of a budget for many companies is workforce expenses. The more detailed the workforce budget, the better your ability to track performance to plan accurately and identify instances when changes are necessary to meet your business goals.

Key Considerations:

• Seasonal employees
  Accounting for seasonality is also very important for your cash flow. Inventories must support anticipated sales and payroll must track with both.
• By department
  When you’ve got different operating lines, shifts and different products, you’ll likely want to spread your expenses by department so that you can see your controllable expenses.
• High turnover rates
  If you’ve got departments such as a call center that have a high turnover rate, you can dig deeper into the payroll numbers and adjust them within the department.
• Individually
  Budgeting at the individual employee level offers significant benefits. You’ll see the cash flow implications of each employee’s taxes and benefits throughout the year as they can be different depending on employee type, position, etc.

Best Practices:

• Integrate data from HR and payroll systems
  HR systems generate robust data sets which increase the accuracy of your forecasts. For instance, Professional Employer Organizations (PEOs) maintain detailed records on every type of employee or contractor who works with the company, as well as their benefit requirements.
• Avoid Excel 
  Accurately calculating total expenses is too complex for spreadsheets. Spreadsheets do not provide enough security. Excel spreadsheets require manual data input from multiple HR and payroll systems.

#5 Forecasting for Sales & Revenue

The viability of every business hinges on revenue streams driven by sales of products or services. Forecasting sales and revenue can be tricky, given that a portion of your revenue may be deferred and because market conditions may affect sales. Understanding your future revenue may require you to use multiple tools.

Key Considerations:

• General Ledger
  Your general ledger can forecast deferred revenue many years into the future, allowing users to see the revenue that will come for 2019, 2020, 2021 and so on, based on signed contracts. This can be used as a starting point.
• CRM data
  Your CRM system provides a wealth of robust data regarding sales composition and revenue potential. By entering or importing sales metrics into an intelligent planning software, you can get an accurate view of your short-term revenue and sales. When you layer this granular data onto your general ledger forecast, you will get a good idea of your actual net sales revenue number

Best Practices:

• Integrate data from CRM systems
  Use the data and metrics you’ve created for tracking sales revenue and potential to populate for sales and revenue forecast.
• Avoid Excel 
  Market conditions can change quickly. A bad jobs report can make a market jittery, prompting temporary expense cuts. Forecast a month in advance using an automated budgeting tool to streamline the process, so that it’s not a time-consuming task.

Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.