Financial Forecasting Is More Crucial Than Your Budget

Once upon a time, businesses were satisfied with creating an annual budget. You used your budget as a measuring stick to gauge performance against assumptions made months ago. You celebrated if you were on target; and if you were off the mark, you brainstormed ways to make up the difference. If your board asked you to run new numbers based on fresh assumptions, it took you days or weeks to create a new set of reports. But times have changed – which is why  financial forecasting is more important than your annual budget. Executives and boards of directors need answers today to ensure they’ll stay competitive tomorrow. They’re focused less on benchmarking current performance to the predicted budget and instead want to leverage real-time data to understand what the future looks like. At the same time, the economy and the workplace continue to evolve, making data-based decision-making more critical than ever.

According to Gartner:¹

• Finance leaders have increased the frequency of various activities in response to COVID-19. More than half (57%) are producing P&L forecasts more often than monthly.
• Reporting results to the board have also increased in frequency relative to normal times.
• Over half of organizations (56%) are reporting to their board more often than monthly.
• Three quarters of finance leaders (75%) report weekly or more frequent updates to the C-suite.

Without the data from the right stakeholders, a unified data set, and robust analytics tools, it’s challenging to deliver complete and accurate reports on the fly. For example:

• Missing or incomplete stakeholder data yields inadequate results.
• Basing projections off data coming from various sources reduces leadership’s confidence in your analysis.
• Pulling financials from disparate Excel spreadsheets introduces clerical errors.
• Building reports that can drill down into specific regions, product mixes, or staffing models demands extra time and a certain skill set.

What’s the Financial Forecast Look Like?

Financial forecasting is especially important when it comes to cash flow. While many businesses face constant pressure to do more with less, they’ve been challenged to produce cash flow reports more frequently, in an economy that’s been anything but predictable. According to Gartner, 71% of financial leaders are conducting cash flow forecasts more frequently than once a week — and they are being asked to share these financial scenarios with their superiors just as often.¹

^‍Because a cash flow report looks at the inflow and outflow of money from your business, they can show you where to cut back on expenses, whether you should pause planned investments, or whether you’ll need to adjust your workforce — and when. No longer a quarterly activity, cash flow scenarios are just one of the routine performance management processes that CEOs and boards have increasingly asked for due to the uncertainty caused by the pandemic.

To get a good cash flow projection, it’s important to:

• Start with sales. Look at all your metrics, leading indicators, and any potential “levers” that might increase or decrease sales.
• Manage every dollar. Review all of your cash outflows/payments. Look at mission-critical items vs. “nice to haves.”
• Produce scenario plans. As a team, you should create a best, middle, and worst-case scenario. For cash and expense planning, use your worst-case scenario to determine the expense base you can take on.

At the heart of each of these activities is trustworthy data that’s easily accessible and reliable. The reality is that many small companies still lack the tools to produce budget information outside of unreliable spreadsheets. A couple of questions to consider as you create your cash flow projections:

• At your board presentation, will you be asked to deliver a forecasted financial position for your company, synchronized to the budget, including various versions and “what if” scenarios?
• Do you have tools that will help you answer questions — on the fly — by allowing you to drill down into the statements to show where the numbers come from and immediately demonstrate the impact of ideas as they happen?

If you are relying on disparate pieces of data from multiple systems, the latter answer is “no” — or not without a great deal of difficulty.

CEOs increasingly share your concerns. They recognize the importance of modern budgeting tools that can help you present your case to them, because they understand the value in their business lies in making data-backed decisions. In fact, 39% of firms with less than $500 million in revenue have automated their financial report generation for this purpose.²

It’s Too Risky to Stay Static

When the pandemic emerged, companies learned how quickly they had to shift their spending, hiring, and production. With market conditions changing suddenly and dramatically, their annual budgets no longer served them. Those who lacked the tools to see where they needed to pivot their business suffered.

Leaders understand that financial forecasting delivers more actionable insights than an annual budget. For example, forecasting what your sales will look like before actual sales results roll in allows you to avoid ordering too much inventory or the wrong mix of inventory. This saves you both time and money in expenses and human resources.

Financial forecasting also can’t be viewed as a one-off activity that is applied to only one part of your business. By using a tool that includes AI and automation, you can apply the same set of assumptions across your business. Because companies are conducting forecasting activities more frequently, they are increasingly adopting modern platforms that facilitate cross-collaboration, planning, and analysis.

Automation: The Key to Planning, Budgeting, and Financial Forecasting

Because companies are conducting planning, budgeting, and forecasting more frequently, they can no longer remain a manual activity. Thankfully, there’s technology that can quickly collect and access cash flow information and other budget items in a way that was never possible before, using a planning and analytics platform that:

• Allows for quicker and more accurate data collection
• Provides key decision-makers with clear, insightful views of their data
• Helps leadership make more accurate decisions about activities that rely on cash flow

Now might be the right time to ditch the spreadsheets and adopt a modern FP&A platform built for collaboration, planning, and analytics. To learn more about forecasting best practices check out our 5 Plays for Intelligent Financial Forecasting.

¹ Gartner, “Benchmarks on CFO Actions in Response to COVID-19: Week of 12 April 2020”² Robert Half, “Benchmarking Accounting & Finance Functions: 2019, 2019”‍