Hot Air Balloon

Accuracy of Budgets and Forecasts

In times of increasing volatility, decision-makers have an even greater need for meaningful, accurate, up-to-date financial projections so they can respond to changes in economic conditions rapidly.

In a recent survey of global corporations, research firm Aberdeen Group found that market volatility is the major challenge for effective financial planning, budgeting and forecasting.

Greater volatility means that budgets and forecasts are almost certainly wrong because it’s not possible to predict how markets, competitors, customers, governments and suppliers will interact and react to changes in the market.

But in high uncertainty situations, the need for accurate budgets and forecasts is also greatly increased as executives, managers, employees and shareholders seek guidance about where the company is going and what the results are likely to be.

This is the forecasting paradox: forecasts are needed most during the times when they are least reliable!

Forecasting in Times of Volatility

In practical terms, the best way for companies to respond to this volatility is to increase the frequency of forecasts and dynamically account for change.

The research shows that as market volatility rises, consideration given to the annual budget declines because management pays far more attention to the timely reforecasts and dynamic, ‘rolling’ forecasts.

This fills the gap by providing useful, relevant information that managers can use for decision-making.

In reasonably static organisations, annual budgets may be adequate but for companies experiencing high volatility and uncertainty, accurate decisions and alignment between planning, budgeting and corporate goals can only be achieved with more frequent analysis and reforecasting.

Forecasting Systems: A Competitive advantage?

While many companies need forecasting that is more accurate and timely, far fewer give sufficient priority and resources to this area to enable it to occur … to their detriment.  Many attempt to achieve this without implementing proper systems or allocating sufficient staff, which usually means that the initiatives are either unsuccessful or only partially successful.

Aberdeen Group’s research shows that companies that are considered “best-in-class” achieve lower costs, higher profits and greater returns.  At least part of the reason for this is that they allocate adequate resources in terms of staff and IT applications to enable effective frequent reforecasting.

An effective budgeting/forecasting system can be a dedicated application (larger companies) or could be equally as effective in Excel (mid-size companies) if managed correctly.  The key is the agility and capability of the system used, not so much the platform itself.

Improved forecasting capabilities provide the company with a competitive advantage because they enable recognition of issues and opportunities, support decision-making, and enable the company to take action far quicker than competitors.

As such, a company’s ability to finalise the budget prior to the beginning of the fiscal period then prepare timely, ongoing reforecasts is a key indicator of the company’s likelihood of success.

Budgeting and forecasting

Capabilities of Leading Companies

Aberdeen found that “best-in-class” performers built capabilities across a range of areas including:

  • Ability to re-forecast as market conditions change
  • Ability to track actual performance vs budget/forecast
  • Capability to perform “what if” scenarios.

Of the various defences taken by business, Aberdeen noted that one of the top strategic actions that successful businesses take is to prepare for a variety of scenarios using (“what if” analysis).

The capabilities listed above clearly shift the focus away from the rear-view mirror and concentrate far more on the road ahead (assuming that fundamentals such as good quality, reliable, timely source data have already been sorted out).

Budgeting/Forecasting is just the Beginning

In relatively static environments, the preparation of the annual budget is often seen as an end in itself: a once-a-year time-consuming activity that once completed, can be largely ignored until the next budget.  However, the budget is just the beginning for companies operating in highly uncertain environments.

There are always two critical sides to the budgeting/forecasting process: preparing the budget together with its various scenarios and subsequent reforecasts, and comparing actual results to these then reporting and analysing reasons for variances.

The use of automation and tools to assist in the planning process leads to an efficiency that is very hard to achieve using manual spreadsheet processes alone.

What Capabilities should your Budgeting/Forecasting System have?

If you’re in a company that needs better systems to enable more timely reforecasting and analysis, here are some key capabilities:

  • Integrated System: you don’t want to be moving data between different systems or trying to integrate your budgeting/forecasting/scenario system with your reporting and analysis systems.  The budget/forecast system should handle all these things.
  • Centralised: you need to have everything in one place so you can control access, provide workflow (e.g. approvals and follow-ups), and handle multiple versions.
  • Ability to Budget/Forecast in Different ways: many parts of the business think in terms of dollars per unit, rather than totals.  To get them involved, they need to be able to input their budgets and forecasts in their terms, then access reporting and analysis the same way.
  • Interactive, Multi-Platform Visualisations: a large part of the business doesn’t understand financial figures and even those who do, often find it much easier to spot issues and opportunities if the data is presented in a visual form with charts, dashboards, scorecards that also allow drill-down.  And since most people are not confined to PC’s, you’ll also want to make this information available via the web, tablets, smart phones etc.  Fortunately, even Excel now has these capabilities!

Where to Begin?

If you’d like to explore this further, get in touch with us for a confidential discussion.

Simply contact Principal Business Analyst Jeff Robson on +61 8 621 8500 or +61 412 581 486 or leave your details below for a confidential discussion.

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