I have worked in many different companies and I have always been surprised by how long it takes to get accurate financial forecasts.
It could take weeks to get reports from finance, so to make sure I was on track for my financial targets, my team often had to keep its own spreadsheets.
There are many tools that can analyse financial data, but at Yordex we don’t believe better analytics solves this problem. One of the major factors that stops companies getting accurate financial forecasts faster isn’t analysing data faster but getting data faster.
In this article we suggest three steps required to get financial forecasts faster:
1. Go back to the source
Information about future costs and revenues doesn’t originate in finance. This information lives in the emails, spreadsheets and heads of the sales teams (for revenue) and of the marketing, development and other operational teams (for spend).
The reason that forecasts are slow is that those teams don’t always communicate their plans immediately to finance, also because those plans change all the time. Even once it is communicated, finance still needs to extract all the information from the emails, spreadsheets and other systems to bring it together into a single report. This is usually a manual and therefore slow process.
The first step is therefore to go back to the source. By that I mean, get the responsible people in the sales and operational teams to input the forecast data directly into the system(s) and make sure they keep that data up to date all the time.
These people are busy though so why would they constantly update a system with their latest forecasts? For that, we need steps 2 and 3.
2. Close the loop between budgets, forecasts, orders and cash
To make sure people keep their forecasts up to date, they should be reminded when their forecasts are out of date and make it easy to update them.
We found that the best way to do this is by closing the loop between budgets, forecasts, orders and cash.
Image 1: Closing the loop between budgets, forecasts, orders and cash
I first need to explain why budgets and forecasts are separate in this picture:
- Budgets are set once a year and are usually not updated more than once a quarter. They are a negotiated number and function as a target for whoever is accountable for the performance of the team in question
- Forecasts are your people’s best guess of future actuals. They are not negotiated and they can fluctuate frequently.
Forecasts are also more detailed than budgets. While a budget is usually at a department level, we like to keep forecasts at a supplier or customer level to make sure they are real. That also makes forecasts shorter term (1 - 3 months) than budgets (1 year), but that is usually sufficient for the decisions forecasts are used for.
If you use your budget as your forecast, you won’t have your company’s best guess of future actuals and you are therefore missing out on what is really going on.
Closing the loop then works as follows:
- By connecting budgets to forecasts, the system can remind employees when there is a difference between forecasts and budgets
- By connecting forecasts to orders, the system can remind employees when orders are different from forecasts. This also helps solve the problem of PO’s being raised late or not at all
- By connecting orders to cash, the system can track how accurate the forecasts were and give people feedback on how they performed against their own forecasts. This can then be used to improve future forecasts
In addition to reminding users that their forecast needs to be updated, the system should also be very easy for them to use. This also means stripping out anything that they as non-finance people do not need or understand.
3. Give people a reason to update their forecasts
Reminding users to update their forecast and making it easy for them to do so isn’t enough. They also need to have a reason to update their forecasts.
Here are some ways to give people a reason to update their forecast:
- Not accepting any other ways of communicating forecasts: old habits die hard. When people can still provide their forecasts the old way they will prefer to keep doing that. You need to be clear that you will only look at one place to track forecasts and you will ignore everything else
- Monitoring forecasts: when forecasts deviate from plans, in a positive or a negative way, the users should get feedback so they know someone is watching and cares about the data
- Making people accountable: if people feel accountable to achieve their forecasts, they will make sure their forecasts are up to date
- Creating financial awareness and understanding: people need to understand why it is important to keep forecasts up to date. This requires a level of financial understanding that people may require training on.
Getting accurate and real time financial forecasts is possible by:
- Going back to the source
- Closing the loop between budgets, forecasts, orders and cash
- Giving people reasons to keep their forecasts updated.
This approach gives management, finance and the board better data to manage the financial performance of the business. By making the process more self-service, this approach will also greatly reduce the amount of work required in the finance team to collect forecast data and produce reports.
Doing all this in spreadsheets is impossible. Yordex provides easy to use software that allows you to implement this process quickly and with a minimum setup cost.