How to deliver more accurate financial forecasts

How can any organization accurately make financial projections in business planning during today’s climate? There are ways around it — here’s a guide for delivering more accurate financial planning and forecasting.

What is the purpose of financial forecasting? Although this may sound like a pointless question, the answer seems even more redundant today.. How can anyone accurately predict what’s around the corner in today’s climate of absolute, unrelenting uncertainty?

Yet, accurate financial projection in business planning is the Holy Grail of financial planning and forecasting. And there are ways we can mitigate the unknowns, or at least quickly adapt to them as we go.

To achieve this aim, we’ll need to look at three essential elements of financial projection in business planning: techniques, tools and culture

1. Techniques for financial planning forecasting

The first aspect we need to consider when delivering accurate financial forecasts is the techniques we can use.

It’s important to know what to include in financial projections. When organizations make wildly inaccurate forecasts, it’s often due to running static, long-range forecasts; ignoring external influencing factors of their business; or by using actual historical numbers as a base and then adding a target growth percentage based on an ambitious growth strategy.

If we’ve learned anything in recent years, it’s that we can no longer take anything for granted.

When it comes to the function of financial planning and forecasting, the days of running traditional annual budgets by relying on static, disjointed legacy technology like Excel spreadsheets are gone — at least for organizations that are thriving in today’s environment.

Modern intelligent financial planning and analysis (FP&A) tools support better decision-making and enable organizations to respond quickly to changes through dynamic planning systems and timely analytics-driven inputs. They enable finance teams to be guided by the following modern FP&A techniques.

Rolling forecasts

Rolling forecasts enable your organization to make planning a continuous process, instead of a static plan that lasts for a calendar year. A rolling, 12-month, quarterly or monthly forecast enables you to see trends, anticipate changes in the external environment, and re-align with changing strategies. This technique helps keep the numbers more relevant and accurate, as well as allowing you to adapt quickly to change.

Driver-based planning

There are an infinite number of external influencing factors, or drivers, of your business, so the best advice is to use the Pareto principle: identify the top 20% of factors that influence 80% of the outcome, then base forecasting exercises on these drivers and the uncertainties around them. Driver-based planning helps reduce the unknowns, potentially increasing accuracy.

Scenario planning

Every planning team across the world is struggling to build reasonable forecasts for the next quarter or even the next month. To counter the uncertainties that exist around key business drivers, finance teams must also harness scenario planning to aid decision making. Here are some financial forecasting examples using scenario planning in FP&A.

And here are the most common model types of financial forecasting.

2. Tools for financial planning and forecasting

The second element we need to consider when trying to improve the accuracy of financial projection in business planning is the right tools.

To help ensure speed, accuracy and agility in financial planning and forecasting, you need flexible tools, with modern, future-proofing capabilities like these below.

Flexibility

To cope with relentless change, every financial planning and forecasting solution should be supported by a modern, flexible cloud-based ERP platform — one with a microservices-based architecture (enabling finance teams to build and deploy apps with bespoke functionality) and open APIs (to allow programs to interact with each other). These systems, unlike legacy applications, are quick and easy to change and re-integrate when circumstances require, helping to ensure more accurate forecasts by adapting projections in line with changing factors on the fly.

Single source of truth

If your financial planning forecasting solution is supported by a modern ERP you will have the single source of truth that’s essential for advanced forecasting techniques. A single source of truth enables finance teams to access accurate, up-to-date (even real-time) information, which reflects the actual state of the organization at any given time, which in turn helps drive more timely business decisions to deliver improved results.

AI and machine learning

Today, every high-quality financial planning and forecasting solution should be powered by AI and machine learning (ML). These emerging technologies can scan historical data faster and more efficiently than an army of finance experts, to help produce more accurate data for forecasting. Sophisticated statistics-based data mining algorithms can help you discover patterns and spot trends. Using AI and ML in finance can also help existing models to automatically adapt to changing data relationships, which helps further improve accuracy.

Automation

Along with AI and ML, automated workflows help to improve accuracy by automating the tedious, repetitive jobs where human error is common, such as laborious data entry and capture. Ensuring you have the right data in the first place is a game-changer when it comes to creating meaningful insights when running the numbers.

Analytics and reporting

Advanced, self-service analytics is another essential component of your financial planning and forecasting solution. This functionality helps teams make better use of all types of data (including unstructured data like audio, video, email and other formats). This improves the sophistication of the forecasting techniques available — meaning FP&A teams can embrace continuous planning and develop self-adjusting driver-based models for budgets and forecasts. All of this improves the speed, quality, and accuracy of financial planning and forecasting.

3. A people-first culture

The third element that’s necessary to deliver more accurate financial projection in business planning is having an open, people-first culture of collaboration, empowerment, and willingness to change. While the right techniques and tools may help you deliver more accurate forecasts, a people-first culture enables it.

Collaboration across teams

Collaboration between finance teams and those in other departments (such as sales, HR, and operations, for example) is as important as having data stored in a single source of truth. Siloed teams and data restrict agility, efficiency and accuracy as much as disparate legacy software. The synergy between teams improves communication, trust and accountability while encouraging buy-in. But, again, it all starts with culture.

Empowering FP&A Teams

The right tools are designed around intuitive, adaptive, self-service tools with a modern user experience, and include a range of capabilities that help make your people’s jobs easier, such as natural-language digital assistants, like Wanda.

By supporting highly qualified people with tools that match the experience they get from technology in their personal lives — and by freeing them from repetitive, manual jobs so they can focus on value-added tasks — you empower finance team members.

This is what we call People Experience. While this approach is based on providing the right technology, it’s also a cultural choice — putting people first — that can help improve your people’s wellbeing, productivity, and job satisfaction, so everyone can perform at their best.

Learn how to deliver more accurate financial forecasts

To discover how Unit4 can help your organization deliver more accurate financial forecasts, visit the Unit4 FP&A page to learn about how our intelligent software can help you achieve better business results.