Financial forecasting and analytics best practices

One of the most important things a finance team can do for an organization is provide a sense of certainty and security about what the future has in store. Viewed in this light, forecasting and budgeting becomes less about approving a plan of “what we’re going to spend this year” and more about developing a view of how the organization can find the resources it needs to achieve its strategic goals.

Accurate forecasting and budgeting - backed by robust analytics and data - represents one of the most powerful tools available to finance teams to achieve this goal. And one of the most reliable strategic management tools there is full stop. But the basics of this vital function are often overlooked. In this article, we’re going to cover some of the basics of financial forecasting and analytics best practices.

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Remember that the forecast is only the start of the process

Most non-finance contributors to the forecasting and budgeting process generally see it as a nuisance that distracts them from their actual job duties - requiring them to spend a substantial amount of time collating and verifying data. For finance, the budget is “business as usual.” As well as creating a plan that makes sense, they must spend a substantial amount of time convincing everyone else in other functional areas that it’s worth their while to contribute.

To fully embrace their role as strategic advisors and guardians of a stable future, finance must evolve past the traditional approach to budgeting and forecasting. In most organizations, when the annual budget is being created, the process followed closely is a specific type of negotiation. Once the budget is approved, it’s seen as something akin to a cast iron contract that the finance team needs to be able to deliver on. This approach is now too rigid to allow finance to unlock the resources necessary for success - especially in an environment as changeable and uncertain as the present day.

To evolve beyond this model and provide a level of flexibility and resilience to your plans that help to build confidence and reposition your department from bean counters to trusted strategic business partners, you’ll need to be able to assess not just pass performance and future forecasts, but provide forecasts for a range of different possible futures.

This will require you to move from an approach that creates a budget and forecast once a year to a more iterative rolling approach. At the end of each month, you’ll need to start asking yourself a series of questions about both what you expected to happen and what actually happened. 

These questions form the basis of forecasting best practices in the post-pandemic environment, and their answers can help provide your entire organization with much greater clarity about the future.

Fundamental forecasting questions:

What happened last month or quarter? 

Does it match what we expected to happen at the start of the month or quarter?

What happened differently from our expectations?

What caused those differences?

How do these differences change our expectations for the next month, quarter, half, and year?

However, getting accurate answers to these questions rests on the ability to quickly gather and analyze data to create accurate and up-to-date reports. You’ll not only need strong finance analytics software to make this possible, but the data visibility and consolidation needed to allow that software to do its job correctly.

Avoid the temptation to deal with what’s urgent instead of what’s important

True reforecasts have traditionally been difficult to pull off - especially as the organization gets down to brass tacks and regular processes like the month-end close take precedence over ripping up the playbook and starting again. 

Routine tasks and workflows like management reporting, cash flow analysis, and auditing are often poorly automated - meaning any time that might be left is often devoted to them. Reviewing the forecast and updating it to reflect new realities can often be seen as an unnecessary or optional extra - a waste of scarce resources, rather than a fatal error that can impact performance across the entire organization.

But without regular reviews and updates of the forecast, your organization runs the risk of trying to predict the future by looking solely at what’s happened in the past without any reference to what’s happening in the present. Forecasting in the rear-view mirror can create an atmosphere where preserving the status quo is more important than creating effective plans for what’s coming. And where the finance team remains preoccupied with firefighting rather than proactively planning to execute a strategy or even avoid or safeguard against easily identifiable risks.

Remember: forecasting only helps you if it happens before changes hit

Many organizations only conduct a full reforecast or start scenario planning only when economic or political conditions change to the extent that they disrupt “business as usual.” There’s a widespread belief that businesses shouldn’t think too much about major disruptions for fear of analysis paralysis.

But consider the implications of this line of thinking: a plan can only help you when it’s made in advance, and if you don’t plan for a disruption you have at least some ability to foresee, then you’re walking into a bad situation blind, and are likely only to be able to behave reactively. Failing to update your forecasts constantly and plan for multiple different scenarios only serves to create a culture where reactive behaviors and a fear of the unknown affects all levels of management. If you don’t have an accurate forecast, you can’t possibly have a reasonable plan, and your ability to identify and mitigate strategic and operational risks will be severely limited. As will your ability to implement effective cost containment strategies in the face of economic shocks or capitalize on new opportunities as they arise on a short enough timescale to remain competitive.

Reactive planning in the face of an emergency can only ever result in your organization throwing good money after bad, trying to fit a fundamentally different set of circumstances to a budget that’s already obsolete.

Finance forecasting software can help you overcome common obstacles to effective planning and analysis - but it requires full data visibility to succeed

A financial forecasting tool that integrates with your operating system of record or ERP platform to provide enhanced data visibility across the entire organization - what’s commonly known as “connected planning” will enable your finance team to produce regular, rolling, driver-based reforecasts. 

Regular reforecasts provide management teams with a shorter feedback loop to address business problems and capture opportunities, especially in areas vital for strategic growth, like:

• Containing escalating costs to protect margins by ensuring that runaway project costs can be identified before they become uncontrollable to maximize profitability even in less-than-perfect circumstances.
• Covering cash flow shortfalls by determining when they’re likely to happen and building up reserves well in advance.
• Launching new services and entering new markets by identifying emerging opportunities while there’s still enough time to intelligently plan your approach and remain competitive concerning other new entrants.
• Planning resources by identifying future bottlenecks and beginning the recruiting process for new talent and contractors well in advance of an acute need.

One of the single biggest obstacles to moving to a rolling forecast model - and in the process improving analytics processes and implementing a more robust approach to scenario planning - is the simple absence of adequate systems and tools to do the job. A high degree of automation is necessary to make the jump, and with many organizations still reliant on Excel spreadsheets to collect, distribute, and analyze financial data (often without a central repository and limited processes for verifying accuracy), it’s impossible for forecasting to become a workflow relevant to the entire organization, with each constituent department taking ownership of their part of the process.

How can Unit4 help you implement a better approach to financial forecasting and analytics?

Our intelligent financial planning & analysis tools are designed for people who like simple but deal with the complex. We help your teams not only understand the numbers but also share and act on that insight to achieve better results.
With Unit4 you get a flexible, integrated, and testable way to cover all your organization’s financial planning needs, whether planning cash flow, managing operational budgets, or forecasting sales, costs, and revenue. FP&A lets you enhance your budgeting and forecasting with intuitive, high-impact data visualizations and scenario planning, to help you to plan, manage and mitigate risks more effectively. To see what it can do for yourself click here to book a demo.