The bookends of a year are a busy time for finance organizations. Yearly budgets and forecasts may be due in December, and in early January you are likely rushing to close the prior year’s books. On top of these two essential tasks, your leadership may decide that the end of the year is a good time to make organizational changes to leadership and reporting structures. This adds additional wrinkles to an already strenuous time for your finance team.
So what about next year’s close? The best time to start preparing for it is right now. As your business grows and adapts to industry changes, budgeting and forecasting processes can be revisited and altered to build a competitive advantage. The more honest, well informed, and efficient your budgeting and forecasting, the more prepared you are for the future. Below are Cervello’s seven tips for tackling budgeting and forecasting woes in 2015.
1. Revisit your cadence: How often are you updating your forecast? Perhaps you may want to consider a 12 or 18 month rolling forecast. Maintaining a constant outlook into the future helps ensure that you’re setting yourself up for success by always considering the company’s long term performance.
2. Ditch the politics: The forecasting process naturally creates dueling interests and ambitions. In most businesses, sandbagging exists. The more a manager downplays their ability to hit certain figures, the better they look when they match or exceed those figures. Unfortunately for those managers, executives are usually fully aware of these practices and will sometimes issue unreasonable targets as an attempt to mitigate sandbagging. This communication failure is ultimately the breaking point that leads to a loss of confidence in your forecast. Encourage honesty and accuracy across your organization. When measuring a manager’s performance, reward for accuracy to their forecast as opposed to how much they surpassed their number.
3. The past is the past-keep it that way: Organizations too often use past performance as an indicator of future performance. Although it’s quick and easy to multiple last year’s actuals by some factor and call it a day, it’s not always going to help your business performance. Successful organizations accept the uncertainty of forecasting, use a range of input and opinion to develop a plan for what they think will happen in the future and prepare accordingly. Although not always relevant, the past should not be completely ignored. It’s important to use past mistakes as lessons learned or to look for instances where history may be repeating itself.
4. Rethink your structural efficiency: As a business continues to grow and evolve, its organizational and reporting structure may no longer be optimal. Products and services may have been grouped a certain way, but these may have diverged which can make reporting structures outdated and inefficient. Take the time to closely review the financial close process throughout your business at both the managerial and analyst level. Is there excess work being completed? Eliminate the rework so that your employees can spend more time focusing on improving the business. Are certain products or services rolling up under a completely unrelated product line or business unit? Consider reorganizing your reporting structure to group similar items together.
5. Assess your technology capabilities: How do you complete forecasts? Is the entire forecast maintained offline in an excel document? Depending on the size of the business and the number of stakeholders involved in the process, updating your planning technology could provide tremendous benefits across your organization.
6. Keep your head above the weeds: At certain stages of the forecasting cycle, organizations may sacrifice long-term for short-term, or vice versa. In October, the focus may be on drafting a realistic, reachable forecast for Q4 with little attention paid to your Q1 forecast for the following year. Similarly, in a long-term strategic plan, you may spend most of your time focusing on the following year while pulling together ambiguous numbers for the out years without much backup. No matter the cadence of your forecasting cycle, ensure that it is developed in accordance with your overall business growth strategy, your expectations of future market conditions, and your perceived competitive advantage. The days of saying “we’ll cross that bridge when we get to it” are over.
7. Make it worth your while: Developing your forecast can be a long, drawn-out, and stressful process. Ironically, the vast majority of forecasts are completed in a manner which provides very little value to the organization or its shareholders. Identify the key activities which drive value and results for your company, and formulate a driver based forecast. Driver based forecasts align finance with business operations to truly understand where your success is derived and what you can change in the future. Utilizing drivers makes forecasting faster and efficient, while providing the opportunity to quickly analyze multiple “what-if” scenarios. This provides you with a more comprehensive view of the future, but most importantly helps you navigate it. Forecasts shouldn’t be a crystal ball that predicts the future, it should help prepare you to navigate it and deliver shareholder value (which, in the end, is your goal).
In summary, be proactive and take a problem solving approach to your budgeting and forecasting process. Politics, shortsightedness, inefficient processes, and a lack of honest communication can very quickly derail FP&A. The term “Close Week” shouldn’t have to strike fear into the eyes of finance professionals. A quality forecast can help shape a company’s long term sustainability so it’s important to keep the business strategy in mind and focus on the company’s potential, not your own personal motives. Lastly, don’t be afraid to shake things up and make some large scale changes. You may just find that things aren’t quite as complicated as they seem.
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Author: Mike Gill