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Now’s the time for driver-based rolling forecasts

Financial planning is never a simple process. But in an unpredictable business landscape like today's, finance teams often find themselves struggling to predict an uncertain future.

Financial planning is never a simple process. But in an unpredictable business landscape like today’s, finance teams often find themselves struggling to predict an uncertain future.

From sales revenues to resource requirements, FP&A teams need sound and valid business information to create accurate and actionable financial projections. But the factors influencing a company’s future performance stretch far beyond its four walls.

But even with today’s big-picture uncertainties hanging on the horizon, finance teams can create business plans they feel confident in. They can enable what-if scenario analysis. It starts with identifying key drivers, updating financial forecasts regularly, and finding new ways to be agile and flexible.

See this webinar on-demand:
“How to Recalibrate and Plan for the New Normal”

Here are three tips to help you plan for financial business success—and respond to constant change—in a rapid-fire economic environment.

Tip 1: Make strong connections to business KPIs

Budgets and forecasts are often created in a vacuum. They’re fiscal exercises done by the accounting team—and aren’t always connected with the executive team’s strategy. Budgets and forecasts are often insensitive to future changes in demand volumes. They can take months to be created yet quickly go out of date once reported.

To keep financial projections and resource capacity allocations aligned, start by creating a holistic business forecast that focuses on both financial and nonfinancial KPIs. Nonfinancial KPIs play a vital role in connecting your forecast to all areas of the business, such as HR, marketing, and sales. In fact, more than three-quarters of CFOs that report having effective metrics also have finance teams that track nonfinancial KPIs. These advanced companies assign targets to KPIs and hold managers accountable for them. This aligns the managers’ priorities and actions with the executive team’s strategy—and hence also with the business’ financial plan.

It’s also important to get input and feedback on the financial forecast from all departments and ensure everyone understands the role they will play in executing the financial plan.

Tip 2: Roll forecasts for accurate financial projections

Financial forecasting should not be an isolated, once-a-year business planning event. It should be an ongoing part of monitoring and managing the business—and these projections should be refreshed at regular periods.

According to an often-sited  report by Aberdeen Group, organizations that update their business forecasts periodically—or use rolling forecasts—are able to create financial projections that are 4% more accurate than those without rolling forecasts.

All business plan forecasts will be less accurate as time passes, whether that’s one week or one month after they’ve been estimated. But if you refresh the forecast monthly or quarterly—depending on the volatility of your business—you can feel more confident it is keeping pace with fluctuations in your business and the economy. This can provide valid pro forma income statements and balance sheets that ultimately result in cash flow statements alerting the treasury function how much it may need to soon invest or borrow.

However, staying up to date requires the right financial planning and forecasting software. Tech tools can give you the latest actuals and modules—and help you test and check your assumptions against real-world data. This allows you to proactively manage change, model outcomes, and course-correct as your business needs evolve.

Tip 3: Resource workforce and expenses responsively

When developing your rolling forecast, take a resource-focused approach to planning by using your financial projections to adjust your resource capacity allocations. What is the future employee headcount and purchasing spend to match your forecast demand?

The right planning and forecasting software can help you optimize costs, resources, and capacities. It is true that capacities are not easily adjustable in the short term so they are thought of as fixed costs. For example, if your company sees a drop in orders on Monday for Tuesday, you’re not going to lay off employees then hire them back on Wednesday when more orders come in. You’ll keep them on staff—and obviously incur some temporary idle and excess capacity. But if you can predict order trends in the future, you may be able to have just the right number of employees on hand at the right times and perhaps lease assets you may have purchased. The fixed costs then become variable ones.

Since the classification of resources depends on your planning horizon, you’ll need reliable and accurate planning technology to classify the behavior of the resources as sunk, fixed, step-fixed, and variable with changes in the demand load and the planning horizon. This helps you make the right resource-related decisions for your business.

Start with financial planning software for increased flexibility

If your systems are creating a roadblock, consider investing in software that will allow you to pull data from multiple departments quickly and easily. This can help you save time and money.

Regardless of where you start, look for opportunities to increase your business’ financial flexibility—so that it can be in a strong position to capitalize on new opportunities as they arise.

So, are you ready to migrate from static annual budgets to dynamic, forward-looking, and driver-based rolling financial forecasts? If so, start preparing now. Increase your understanding and competency with modeling and analytics. Think like an engineer or a scientist. Expand from being a bean counter to a bean grower.

See this webinar on-demand:
“How to Recalibrate and Plan for the New Normal”

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