Forecasting helps your organization anticipate changing conditions. As a controller, you play a crucial role in setting up and implementing the process surrounding forecasting. This gives you the perfect opportunity to act as a business partner by validating forecasts in terms of assumptions and starting points or by providing line managers with relevant forecast information. But also by thinking along about improvement actions to bring the forecast in line with budget or strategy. What can you do to make forecasting faster, lighter and at the same time more reliable? What should you not do? And why is this not always easy in practice?
Do's in forecasting
Forecasting is a complex process with many stakeholders. How can you ease this process and achieve the desired result? 3 pieces of practical advice:
1. Make the organization aware of the purpose of forecasting
The function of the forecast in the planning and control cycle is fundamentally different from that of the budget. A core function of budgeting is target setting, or setting the dot on the horizon at the end of the coming planning year. A budget contains stretches that are consistent with strategic ambitions. The forecast, on the other hand, identifies in time potential deviations from targets in the budget as shown in the figure below.
An organization looks ahead because it cannot react immediately and ad hoc to deviations from the plan or budget. After all, it takes time for improvement measures to take effect.
2. Take operational plans as a starting point
Operational processes and systems support the business on a daily basis and contain plan data over the horizon of the forecast. At a fixed point in time, take a picture or snapshot of the operational plans, which is the starting point for the financial forecast. At that point, the operational plans are integrated with the forecast. The snapshot is created financially through a mathematical calculation model, resulting in a projected balance sheet, income statement or cash flow statement. Deviations from budget and strategy are quantified herein.
3. Streamline the process around forecasting
Implementing forecasting requires a transparent process in which all steps in the planning process are well developed and communicated. Implement the steps based on a predefined calendar or time table. Each cycle is therefore concluded with a management meeting in which an evaluation of the forecast takes place and decisions on improvement actions are made.
Don'ts in forecasting
What should you definitely not do around your forecasting? The three most important don'ts in a row:
1. Seeing the forecast as a target
So unlike the budget, the forecast is not task-setting. With the budget, you determine the internal and external result expectations for the coming year that are consistent with your long-term strategic plan and objectives. The forecast, on the other hand, is a 'sanity check' or 'early warning': are you acting in line with the budget and thus with the strategic course you want to take in the coming years? The focus in the forecast is precisely on evaluating deviations between forecast and budget norm and identifying improvement actions to adjust towards the annual plan.
2. Prediction based on detailed information
To make quick and timely adjustments, it is smart to reduce the level of detail in the forecast. In other words, no more detail than necessary and definitely less than in actuals. It is a misconception that forecasting detail leads to higher accuracy.
3. Searching for a blueprint for a standard process
Be sure to check out how leading companies have strengthened their planning. You can't simply copy their processes, however. A blueprint for the ideal planning process does not exist. Companies differ in size, diversity, maturity of operational planning processes, organizational structure, culture, management style and vision. Therefore, a "customized" design that addresses these aspects is needed.
Difficulties
In practice, we see that some aspects of forecasting create dilemmas for many organizations. Which three movements are important and difficult at the same time?
1. From wishful thinking to reverse thinking
Forward-thinking companies base forecasts on a holistic, realistic view of the future. The forecast is not a target based on wishful thinking about what the future of the organization should look like. In terms of mindset, it involves thinking in reverse: what is today's actuality and how can we deploy opportunities and possibilities from the current situation in such a way that we achieve the planned target. Forecasting is not a process of negotiating new targets.
2. From number crunching to business planning
We often see forecasting driven strictly financially by the Finance function. Forecasting is then a process of "number crunching," reporting financial numbers sometimes based on unnecessarily detailed information. This is understandable, though. We think these details allow us to accurately predict the future. But we also know that the future will look different than we expect now anyway. After all, the future cares little for our predictions. More detail does not give more certainty, certainly not in the long run, but it does require more effort from the organization.
3. From political behavior to openness
An open and actionable culture around forecasting is essential. After all, good news or bad news must surface quickly. In particular, action management and wanting to share a vision of future developments requires a culture based on discipline, openness and trust to exchange information openly. This allows you to collectively look at the future objectively and critically. When a negative deviation between budget/forecast and actual performance leads to penalties, managers will try to manipulate forecasts. This also encourages second guessing of forecasts, where managers interpret and correct each other's figures according to their own judgment and intuition.
Realistic view of the future
Forecasting requires a holistic and realistic view of the future. The challenge for the controller is to bring together both good news and bad news so that the organization can anticipate in time with improvement actions. This also means that the finance function is moving away from its traditional role as scorekeeper and into the role of business partner.
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