Forecasts are a great tool that informs people of what would be the best decisions to make. In day to day life, people commonly look at forecasts relating to traffic or weather and people tend to check these incessantly or barely at all. When people do check these forecasts, they use the data to inform decisions; this can look like taking a different highway line if the usual way to work is predicted to have high traffic, or deciding whether or not to take your umbrella based on the chance of rain. On the other hand, if you don’t check these forecasts, you will have to deal with whatever comes your way, as it happens; you may end taking your usual traffic route, not knowing about a traffic jam and be stuck on the highway for an additional 30 minutes, or get soaked from the weather, because you didn’t expect it would rain.

In business, organisations cannot afford to ignore their FP&A team’s forecasts, because the potential consequences have much higher stakes.

When an entire organisation values their forecasts, the forecast data shapes everything from market strategies, resource allocation, budgets, and more. When forecasts are ignored, targets can be missed, capacity can be over or under-allocated to important projects, vital equipment or resources may not be available, and customer satisfaction may fall.

However, even if an organisation values their forecasts, it is quite often that FP&A teams may be slow to evaluate the effectiveness of their forecasting methods or make significant changes to improve or optimise their forecasts.

The approach and ways that this push to review and develop forecasting processes will differ from company to company. There are a few key areas that FP&A teams will need to bear in mind to optimise their forecasts to become not only an effective measurement tool but also a beacon for value creation:

1. The top-performing FP&A Forecasts are quick.

Top-performing firms are able to prepare their financial forecasts in 8 days or less, and the poorest performers take at least double that length.

This has been highlighted in research from APQC, a productivity and quality control research organisation, from their most recent Planning and Management Accounting Open Standards Benchmarking survey - which incorporates responses from more than 1,400 business entities.

According to Perry D. Wiggins, from APQC, “if it takes a finance team 16 or more days to create a forecast, that time could be better spent performing analysis that could help the organisation navigate into calmer waters."

Wiggins emphasises the importance that financial forecasts are made quickly. If forecasts are slow to produce, they become unreliable across different teams in the organisation, especially compared to forecasts that can keep up with the rapid movement across sales, marketing, and other fast-paced teams. APQC analysts also suggest utilising a “cycle time” as a forecasting metric to track the performance of the finance department’s contribution towards the growth and health of the organisation.

“Forecasting well and forecasting quickly are often linked. Those who can do it quickly are most likely capitalising on available technology and are able to produce mini-forecasts on demand. They are tracking key drivers and have established algorithms that allow them to pull a forecast at any time. They’re also tracking leading predictive indicators.” - Perry D. Wiggins.

Wiggins further highlights that a lot of guesswork can occur in forecasting, and this subjective input often takes up more time and lowers accuracy as key drivers of performance tend to get overlooked.

2. Flexible FP&A Forecasts are the Best Forecasts.

Forecasting has been a popular area of study in business, and it is probably not a surprise that experts at Harvard Business School have ongoing studies around it. In a 2019 Harvard Business Review Article, C. Fritz Foley and Mark Khavkin, two Harvard professors, have conducted an analysis of numerous large and successful companies, which has shown: short-term thinking just doesn’t work.

“The forecast is a living instrument and should be periodically updated to reflect any changes in circumstances. Amendments to the forecast are particularly important for firms in evolving business environments or firms that are transforming,” Foley and Khavkin write. “Such forecasts embody the view that things do not typically go according to plan and there is value in taking the first step, adjusting, and then continuing to head in the most promising directions.”

Foley and Khavkin suggest that forecasts should project operating and resource needs over a 3-5 year period, alongside keeping in mind the context with the nature of the organisation’s business sector, growth rates based on competitive dynamics, and non-financial team inputs. These types of forecasts have an appreciation for the extent they allow leadership teams to learn and grow, and their accuracy (though, their accuracy may fluctuate).

3. The most effective FP&A Forecasts are Forearming.

It should be emphasised that forecasts are not just a way of pointing out potential opportunities or an intellectual exercise. Effective forecasts have the ability to warn leaders of when they need to make major mitigations or changes to avoid disasters, especially when it comes to cost management. Having a forewarning of disaster is empowerment to an organisation to take high-value decisions at the right times.

The importance of forewarned visibility and taking timely action was emphasised in a conclusion from the research firm Gartner in one of their studies. This study analysed the different types of “cost anchors” that negatively impacted business performance.

“Most companies don’t have a clear mechanism to flag when costs are likely to spiral out of control,” the Gartner report summarises.

In Gartner’s report, they show that organisations suffer from several cost anchors; one notably being poor cost visibility. 87% of organisations studied harbour poor visibility into their costs, which can be paramount to the failure of a business. Poor visibility can be addressed through a mix of rolling forecasts and both driver-based and zero-based budgeting solutions.

Get acquainted with Rolling Forecasts

To get the best forecasts they have to be quick, flexible, and forearming. These three tenets are what drive accuracy and success in modern business, and will ensure business stability. Organisations need to empower their FP&A teams with software platforms that can create effective forecasts that reach all of their departments if they want to ensure continual and lasting success. Luckily, we have just the solution.