Archive for the ‘Budgeting and Forecasting’ Category

Why Implement Continuous Rolling Forecasts?

The annual budgeting process has been around for decades and still forms part of the performance management framework for the majority of organizations. As the economic environment has evolved and become more dynamic, has the budgeting and forecasting capabilities in your organization also evolved and adapted to this change?

Unfortunately, for many organizations, the annual budgeting process still rules. Despite the evident drawbacks of the traditional budgeting process and developments in financial planning technologies, there is still widespread reluctance by top management to embrace alternative planning processes. The traditional annual budget used by many companies is static in nature, not aligned to strategy setting and execution, and focuses mainly on cost reduction as opposed to value creation.

In today’s volatile, uncertain, complex and ambiguous economic environment, in order to make effective decisions, management must be able to understand and respond quickly to the impact of competitive forces and rapid changes affecting their businesses. They must be able to look into the future, assess risks and potential opportunities and proactively manage them. Different decisions require different time horizons and planning capabilities.

The problem with the annual budget is that it distorts this long-term visibility and stifles innovation. Much emphasis is placed on the current fiscal year, which is normally twelve months. As a result of this short-term focus where management is driven to achieve the predefined annual targets, a culture of predict-and-control becomes prevalent. The focus is on making sure that the forecast numbers are achieved.

What do I mean by the above? In the traditional budgeting and forecasting processes, management come up with an annual performance targets, mostly financial, broken down in a twelve-month period. Every month, actual results are compared against planned results and variances (Monthly and YTD) identified. The computation for the monthly forecast therefore becomes:



The problem with the above approach is that the forecasting process is disconnected from the specific drivers of the business. It fails to understand that the purpose of forecasting is to map the strategic direction of the organization, identify risks and potential opportunities, and coordinate future activities. It is not a performance evaluation tool and a re-validation of the company’s commitments. When forecasting is used as a performance evaluation yardstick, chances are that management will purely focus on achieving the targets set at the beginning of the year.

What is critical to note is that forecasting should be based on real business demands and the real business environment. At the same time, rewards must be according to the value created and not based on meeting set financial targets because the later can easily be gamed.

Does this therefore mean that the traditional annual budgeting and forecasting process should completely be abolished? Some scholars and professionals have called for a complete elimination of the entire process raising some of the issues already mentioned here. I personally believe that combining a number of practices such as driver-based planning, rolling forecasts, Strategy Maps and their associated Balanced Scorecards is key to addressing traditional budgeting and forecasting drawbacks. No one practice offers a remedy for all these issues. Remember enterprise performance management (EPM) is the integration of various managerial techniques to support strategic decision-making and improve performance.


The Benefits of Implementing Rolling Forecasts

Enables Management to Adapt to a Changing Economic Environment

One of the mostly mentioned disadvantages of the annual budget is that it is static in nature and ignores changes in the market place. Targets are set based on the various assumptions identified at the beginning of the year and by the time the final budget is signed-off, most of these assumptions are out-of-date and irrelevant.

For example, in many companies, the annual budgeting process lasts on average between three and six months, and sometimes even longer. The process is back-and-forth with revision after revision. In today’s volatile economic environment, a lot can happen in the six-month period which has far implications on the strategic performance of the business. Because of the amount of time taken to agree and sign-off the final budget, these changes are not factored in.

Implementing continuous rolling forecasts offers a remedy for this issue of adaptability. Most continuous rolling forecasts are prepared at least four to eight quarters past the current quarter’s actual results. This gives management greater visibility into the business and prepare agile responses to changing market conditions.

Even at the time of budgeting, at the end of the second quarter of the financial year, you would have already gained insights that relate to first half of the next fiscal year and this immensely reduces the time required to produce the final budget.

Management need to be able to look at what is possible, rather than merely react to what has occurred. Hence the need for forward-looking forecasts which act as early warning systems when you have drifted off-course.


Allows Management to Perform What-if-Analysis

Most budgeting and forecasting processes are a series of one-off annual or quarterly events. They are prepared based on historical data imports from the company’s ERP system thereby ignoring the key business drivers of the business. Plans are often extrapolated from historical performance and end up being a simple accumulation of financial trends.

With rolling forecasts, management are able to focus on key assumptions and drivers of strategic performance, model possible future outcomes and identify the events that might trigger them, evaluate the impact of these events and design contingency plans to remedy the negatives.

Unlike budgets that may have hundreds of line items to focus on, continuous rolling forecasts focus on the strategic key business drivers. This reduces the amount of time spent on planning and frees up time on other initiatives that drive greater value and high performance. Because rolling forecasts challenge management to have a continuous business outlook, the focus is on leading indicators which helps the organization identify future performance gaps and re-adjust.


Shifts Management’s Mind-set from Annual Planning to Continuous Planning

Traditional budgeting often creates a fixed performance contract that limits an organization’s ability to be responsive to ever-changing market conditions. Because of this, there is natural tendency for management to ignore changes after the fiscal period even if they do have negative impact on the performance of the business.

On the contrary, rolling forecasts help management eliminate this annual mind-set, are aligned to business cycles and help managers continuously look into the future and proactively design counter-measures to remedy the drawbacks of the annual budget.

As already mentioned, it is time-consuming to produce the final budget and get it signed-off. By the time the budget is finalized, the market has changed dramatically and its assumptions are out of date. Because the budgeting process is an annual exercise, there is no room to adjust the levers that drive business performance.

Quoting a great quote by one of the Chinese Philosophers, Lao Tzu:

A good traveller has no fixed plans, and is not intent on arriving.


The same applies to businesses. The fiscal year end must not be the destination. It is therefore imperative that management considers all scenarios when making key strategic decisions. By implementing rolling forecasts and continuously updating the forecast to reflect current business conditions, management will be able to mitigate the risks of traditional budgeting and forecasting inaccuracies.

In order to fully benefit from rolling forecasts, the budgeting and forecasting capabilities must form part of the organization’s integrated enterprise performance management (EPM) framework. Additionally, there must be strong executive buy-in with regards to use of rolling forecasts to drive business performance. This buy-in is key to ensuring greater acceptance of the use of rolling forecasts by the organization’s business unit managers.

I welcome your thoughts and comments.

Improving Finance’s Financial Planning & Analysis Capabilities

As the role of the finance function continues to evolve from reporting on what happened in the past to driving business performance and creating enterprise value, the function’s financial planning and analysis capabilities need to be improved.

More than ever, increased volatility and uncertainty is placing considerable pressure on finance leaders to support business decision-makers by delivering actionable real-time insights.

Finance leaders are required to have a 360 degrees view of the risks and opportunities the organization is exposed to and respond promptly to change.

Recently, CFO Research in collaboration with SAP conducted a global survey of senior finance executives across various industry segments to better understand how finance leaders are supporting decision-making and value-creation purposes within their organizations. Based on 335 senior finance executives’ responses, the survey revealed the following four key findings:

  1. Being agile is becoming an increasingly source of competitive advantage. In a volatile, uncertain, complex and ambiguous business environment, having the ability to respond and adapt to change is the key to survival and value creation. Unfortunately, volatility and uncertainty is the norm these days. This in turn is requiring finance to provide real-time analysis and decision support. Of the surveyed finance executives, 84% are expecting senior management demand for adhoc decision support and analysis from finance to increase more in the coming years.
  2. Current financial planning and analysis IT systems are failing to deliver actionable insights. Organizational CFOs are hungry to see their functions conduct highly sophisticated, predictive business analysis, such as scenario planning, “what-if” analysis and risk modelling. However, current IT systems are falling short of intensifying demands for real-time analysis. For example, 53% of the senior finance executives responded that they are trading off sophisticated, predictive business analysis in order to produce reports in a timely manner. Furthermore, 14% are currently able to instantly respond to ad-hoc reports for business analysis via interactive, self-service interfaces. The majority (61%) of senior finance leaders are responding within one day of receiving request and 20% are responding more than one day after receiving the request.
  3. Lack of integration between financial planning and core ERP systems. Only 36% of survey respondents indicated that their company’s financial planning systems are well integrated with each other, with minimal manual intervention. Further worrying, only 15% of the respondents indicated that those financial planning systems are very tightly integrated with their core ERP systems and require minimal data migration.
  4. There is increased pressure on finance teams to drive business performance and create value. One of the critical mandates of the organization’s finance function is delivering more forward-looking and more interactive information and analysis into the hands of business decision makers. As the business environment continues to evolve, 88% of the surveyed finance leaders agree that this mandate will increase more in the coming years.

In light of these findings, what should senior finance executives and their teams do?

  1. To be the organization’s sought-after trusted adviser, finance must move beyond focusing only on the company and its profits and start seeking new opportunities to grow the business and expand. A team is as good as its leader. The finance leader must make sure that his team constitutes people with diverse backgrounds but all working towards the same goals of delivering real-time actionable insights, managing enterprise risks and creating sustainable value. It is critical to have people who possess the ability to challenge current assumptions and ask the right questions. People who do not possess a herd mentality but are prepared to go against the status quo as long as they are bringing something tangible to the group.
  2. The finance function must become agile, innovative and adaptive. Disruption in the business environment demands the function to develop new management models, standardize processes and be responsive to threats and opportunities. Keeping abreast of what is happening in the business environment, both externally and internally, helps sense and respond to changes quickly. Playing a “wait-and-see” game is no longer sufficient in today’s ever-changing business landscape. Business leaders need to be able to thoroughly scan their operating environments, understand risks and opportunities and take immediate strategic action.
  3. In order to improve the function’s financial planning and analysis capabilities, senior finance executives must ensure that their organizations have invested in IT systems that meet the demands of real-time, ad-hoc analysis. For example, the IT system must be able to conduct highly sophisticated, predictive business analysis in timely manner. Finance must be able to deliver more than just reporting on historical data and have the ability to deliver clear, actionable, forward-looking and real-time insights. Furthermore, it is important that finance provides reports and analysis that is easily understood by all managers to enable them make effective decisions.
  4. The organization’s financial planning and the core ERP systems must be integrated to ensure more effective decision-making. As the providers of information and analysis for sound decision-making, finance should ensure that it is providing one version of the truth always. It is therefore critical to have tight integration of financial systems with the other ERP systems if the function is to provide decision support and help create value. The integration of the systems should require minimal manual intervention and minimal data migration. In other words, there should be a reduced amount of time, attention and resources devoted to data migration and manual reconciliation connected with financial planning and business analysis. Having an integration of systems helps achieve consistency in processes and transparency of data throughout the consolidation data to financial results.
  5. Not all data is important for decision making, some of it is just noise. One of the barriers to improving financial planning and analysis capabilities is lack of data standardization across the organization. In today’s information age, it is critical that finance leaders and their teams are able to separate the wheat from the chaff. Data used for planning purposes must be validated and consistent throughout the company. How reliable and timely are your data sources? Also, there is need to train employees on the importance of data decision-making and data science.

As the pressure on senior executives intensifies to manage increasingly complex businesses and improve the organization’s competitive position, finance leaders will always be expected to deliver insights and analysis that are able to make the most difference to the business.

Factoring Risks into Financial Forecasts and Planning

VUCA, short for volatility, uncertainty, complexity and ambiguity is an acronym used to describe the world we live in. Since the onset of globalization, CFOs have had to deal with a variety of uncertainties and risks. From the traditional operational, financial, credit and market risks to strategic risks, the list goes on.

Yet despite having knowledge of these risks and how they can derail the company from its successful course, very few CFOs and their teams factor risk management into their financial forecasts, budgets and plans.

As custodians of the forecasting and planning function, it is the responsibility of CFOs to ensure that risks to the operational existence of the business are identified, assessed and properly mitigated. Unfortunately, regardless of its limitations, some CFOs still rely heavily on the annual budget to drive business performance. A lot has been proven and written on the shortcomings of the traditional budgeting process. For example, the annual budgeting process is time-consuming and by the end of the first quarter, most of the assumptions used to prepare that budget no longer hold true hence the need to adopt driver-based rolling forecasting and planning.

To successfully take advantage of emerging opportunities and help empower strategy, the Financial Planning and Analysis (FP&A) team must embrace risk-adjusted forecasting. Instead of focusing entirely on single-point estimates that fail to identify risk exposures, risk-adjusted forecasting enables CFOs to look at possible outcomes and probabilities based on multiple risk variables. The macroeconomic environment is always changing and as a result CFOs ought to be proactive rather than being reactive.

It is no longer sufficient for CFOs to know what happened in the past. There is need to move on from the traditional cost-variance analysis towards a more forward-looking approach. Thanks to developments in analytical technologies, through the use of descriptive and prescriptive analytics, CFOs are able to gain insights on why something happened as well as model the future. In other words, technology is addressing the challenge of preparing forecasts based on gut feel. Through risk-adjusted forecasting, forecast models can be built that are based on facts such as competitor activity, production activity, regulatory pressures, supply and demand changes etc. Having an expanded view can help many companies address interconnected risks, some of which may have been previously identified, others that may have gone unnoticed.

Rather than entirely focusing on hitting one set of given numbers, CFOs should stress tests their forecasts and rigorously challenge the assumptions used to create those forecasts by asking the right and hard questions. This will help identify an understatement or overstatement of risks and take corrective action. Given that growing a business brand and improving revenue growth and operating margins all come with a bag full of risks, if CFOs turn a blind eye and ignore these risks, they definitely are bound to steer their organizations towards an iceberg collision. Risk types and risk drivers vary by company, business and industry. Thus it is critical for CFOs to have an enterprise view of risk if they are to be successful in addressing any material concerns facing the finance function and the organization as a whole.

At the same time, factoring risks into the forecasting and planning processes ensures effective allocation of investment resources based on multiple risk-return positions. Identifying the various risks the organization is exposed to as well as their drivers requires both a bottom-up and top-down approach. A bottom-up approach is helps identify, assess and evaluate the risks operating at the shop floor level. A top-down approach looks at the risks of the strategy and to the strategy and how they can be mitigated.

Understanding common risks and how they cascade and interact provides a foundation from which risk-adjusted forecasting frameworks can be developed and then set up throughout the entire organization. Care must be taken that you get a balance on the number of risks and their drivers based on perceived importance, data availability and practicality. The idea is to get valuable insights that drive effective decision-making as opposed to overburdening the business.

Producing Reliable Forecasts That Improve Decision-Making

November 28, 2014 Leave a comment

Although almost every organization uses forecasts to predict and manage future business performance, only a few of the produced forecasts are reliable despite the amount of energy and time invested in producing them. The problem with unreliable forecasts is that they have far-reaching strategic and operational implications.

They lead to poor decision-making which in turn costs the organization a lot of money. Analysts from the investment community closely monitor the forecasting capabilities of the companies they track. Failure to hit forecast targets can result in the share price getting hammered and eventually a “sell” call by the analysts. This has negative repercussions on the market capitalization of the organization. Of course no one can accurately predict the future. However, producing forecasts that are within five percent of the actual performance is considered accurate.

Accurate forecasts are a potential driver of business performance and investor confidence. They help identify opportunities to drive business improvement, manage risks, determine growth strategies and reinforce stakeholders’ confidence in the business. One of the reasons why so many forecasts lack reliability is because the data used to produce these forecasts is either erroneous or incomplete. For example, some organizations depend largely on internal data to predict future performance at the expense of external data such as consumer demand, competitor activity, economic drivers etc.

To be able to forecast with confidence, it is imperative that those individuals tasked with the forecasting responsibility leverage information more effectively. In addition to internal reports, they should make use of government reports, market reports and competitive data as well as data on non-economic risks that could have important impacts on markets or operations to produce forecasts. Also, operational managers who are closer to the business scene must be involved in the forecasting process.

There is a mistaken belief that forecasting is the sole responsibility of finance. Surely finance plays the leading role, but it is important to give the operational managers that drive business performance greater ownership and responsibility for key parts of the forecasting process. By constantly liaising with their operational counterparts, finance will be able to quickly pick up changes in the business operating environment, perform what-if-analysis, update their forecasts accordingly and provider better insights that assist executives make informed decisions.

Despite the advent of reliable forecasting software, there is still a huge reliance on spreadsheets by a majority of organizations to produce forecasts. Although it is possible to produce reliable forecasts using spreadsheets, this is dependent on the size of the organization or business. As the business grows, it becomes increasingly difficult to continue sticking to spreadsheets. This is because spreadsheets are great for building a single department budget and forecast but don’t work well for rolling up the budget and forecast for tens of departments and divisions.

Furthermore, spreadsheets are more prone to errors. Poorly constructed spreadsheets make it worse by mixing formulas and data so it is easy for users to type over formulas. Think of organizations that have lost millions of money just because one individual misplaced a comma or incorrectly typed a figure to a certain cell or row. At the same time, it is worth knowing that technology alone is not the answer. Getting the processes and data right is a critical first step. Thus to obtain the necessary benefits, alignment of both processes and data with technology is key to avoid the risks of automating a broken process that uses unreliable data.

Then there is the issue of “sandbagging” the forecast to protect bonuses. Costs are a bit overstated and revenues a bit understated. If performance is rewarded mainly on the basis of hitting financial targets, managers are more likely to deliberately become conservative in their estimates. Such behaviour should not be encouraged.  Sandbagging and gaming interferes with good decision-making. Although such managers appear heroic in the eyes of their peers, it means that important decisions such as resource allocations and investment choices are being made on the basis of inaccurate or incomplete information. Thus to make better decisions, senior executives need to instill a culture where reliable forecasting is encouraged and rewarded. They should demand honest forecasts regardless they like or don’t like what they see. Additionally, incentives must be aligned to relative performance rather than targets.

As the business environment increasingly becomes dynamic and turbulent, managers and senior executives need to review the forecasting capabilities of their organizations and implement reliable rolling and driver-based forecasting. Without reliable forecasting, key opportunities and risks are likely to be missed. On the contrary, reliable forecasts enable the organization to become sensitive and responsive to business conditions and make appropriate changes in real time. They can improve the effectiveness of monitoring by recognizing the context of changing circumstances as these occur. This in turn assists managers to make bold decisions with greater confidence despite whichever direction the market moves.

Remedies for Forecasting Illnesses

Yesterday I wrote about the seven common symptoms of forecasting illness and how they can lead to uninformed decisions making. In an increasingly volatile and uncertain world, the ability to anticipate the future, even if only a few months ahead, can mean the difference between survival and failure. Unfortunately, future uncertainty is much greater than most managers concede. Thus if managers fail to demonstrate an understanding of the dynamics of their businesses performance stakeholder confidence can seriously be undermined. As a result, managers must place an increasingly high priority on improving their forecasting processes.

How can managers use forecasting tools to plan effectively and build better strategies? Instead of seeking predictability, managers should channel their efforts into being prepared for different incidents and the reality of change. Take for example the Global Financial Crisis of 2008. Prior the financial meltdown, majority of global policy makers and business leaders were very upbeat about the performance of their economies despite signs of looming danger. Not many people anticipated the after effects of a global financial system collapse on their businesses and as a result some reputable organizations collapsed and filed for bankruptcy while others were bought over for at cheap market values.

Volatile markets make it enormously difficult to forecast effectively. However, although many things that occur in the business world may not be predictable, their randomness should at least be modelled. For example, there are bubbles, recessions, financial crises and natural disasters which are known not occur very often but do repeat at sporadic and irregular intervals. While leaders, managers and employees are reasonably aware that these rare events can occur, and may even be able to imagine several examples, they consistently underestimate the likelihood of at least one such event including the ones they didn’t imagine occurring. This is because human beings have a tendency to underestimate the size of rare events, which in most cases, leads to negative consequences.

It is not only business catastrophes that producers of forecasts fail to anticipate. They are also unable to predict business success. For example an unhealthy obsession with a particular forecast number as well as the failure to provide enough forward visibility and discern trends in performance makes the business to miss on emerging opportunities. When preparing forecasts; managers should accept that they are operating in an uncertain world, assess the level of uncertainty they face and augment the range of uncertainty.  It is critical to have the ability to perform “what if” scenarios and change analysis. Additionally, managers should be able to re-forecast as market conditions change. This will protect managers from having a single tunnel vision about the business which in turn helps them formulate appropriate strategies to deal with rare events when they occur.

To address their forecasting shortfalls, some organizations believe that investing in latest software tools will solve their problems. Unfortunately, the application of IT solution without understanding the real problem and its source will not fix a broken forecasting process. For example, some managers believe that investing in some sort of trendy software will help them collect, consolidate and analyze forecasting data quickly enough.  This is just a quick fix which often leads to lots of numbers, gaming behaviour and wastage. If you do not first solve the root cause of the problem, there will be no reprieve.

The other quick fix that other managers resort to involve using complex statistical methods hoping that these will help them better anticipate the future. Human judgement is worse at predicting the future than are statistical models. In fact, human beings are often extremely surprised by the extent of their forecasting errors. Thus instead of using simple statistical models to forecast, some managers are preoccupied with applying complex models. Simple statistical models such as moving averages are better at forecasting than complex ones. Complex models often attempt to find non-existent patterns in past data whereas simple models ignore patterns and just extrapolate trends.

The benefits of getting your forecasting right are considerable both in terms of improvements in efficiency and effectiveness. Better forecasting results in informed decision-making. Right things will be done at the right time – there will be no surprises as well as wastage of time and resources. Improved forecasting also leads to better situational awareness which helps the organization to spot discontinuities early, avoid unnecessary costs, formulate fitting contingency plans, become agile and exploit opportunities.

Good forecasting also enhances teamwork and collaboration. If sales, marketing, operations, finance etc. are all involved in the forecasting process this leads to one set of numbers being produced and agreed upon instead of having numerous competing forecasts. Lastly, by anticipating better and responding more quickly, the performance of your business will become more certain and less prone to surprises.

I welcome your thoughts and comments.



7 Common Symptoms of Forecasting Illness

When making decisions, managers should not rely only on information about what happened in the past. They also need information about what they believe will happen now and in future. Effective decision-making is driven by information, information about the past and information about the future. This information is often created through the process of forecasting. Without this information, management is no more than guesswork.

In today’s volatile and uncertain environment, it is difficult for any organization to survive without some sort of ability to anticipate. Simply forecasting better is not enough. You have to know what actions to take if the picture your forecast point is negative. Thus you need to clearly understand the link between forecasting and decision-making. Bad or poor forecasts can misinform decision-making and derail the company.

It is a known fact that no one can predict the future with certainty. Instead, good forecasting is about systematically and logically amassing information to give managers forward visibility of likely outcomes, potential risks and opportunities. If your organization’s forecasting process is not granting you the clear visibility you need to make informed decisions, this is a sure sign that the process is broken and needs repairing. While the importance of forecasting is well documented, in practice it is rarely performed well, sometimes with disastrous consequences.

In their book Future Ready: How to Master Business Forecasting, Steve Morlidge and Steve Player point out seven common symptoms of forecasting illness that need fixing and these are:

  1. Semantic Schizophrenia. This refers to confusion about the aims, purposes and characteristics of good forecasts. Organizations suffering from this condition often find it difficult to cope with unexpected or unwelcome forecast outcomes. In these organizations, bad news is not welcome. Instead, leaders want to hear only good news. Thus instead of producing forecasts that reflect the truth, employees tend to produce forecasts that reveal what managers want to hear to avoid being yelled at. These employees believe they are always fighting a losing battle hence producing forecasts that makes the managers happy. If they deliver forecasts with bad news, the level of stress associated with this is astronomical hence delivering good news only minimizes these stress levels.
  2. Single Point Tunnel Vision. This is an unhealthy obsession with a particular forecast number. Everything that lies outside this particular forecast number is considered wrong and the more precisely it is stated, the more wrong it will be. In these organizations, executives are always debating about what the forecast numbers should be. There is no thinking outside boundaries and assumptions are not challenged often resulting in poor judgement and decision-making.
  3. Delusions of Accuracy. This is the mistaken assumption that it is possible to be perfectly accurate and that lower errors are representative of better forecasts. Managers are obsessed with achieving forecast accuracy and people feel that they will be punished for getting forecasts wrong. When forecasting, it is important to know that forecast errors are inevitable. There will always be error and sometimes the error will be greater as a result of the factors that are outside the control of the individual performing the task. It is therefore critical to make a distinction between error that is the result of random fluctuations and error that may be the result of poor forecasting. Good forecasts take have a reasonable margin of error factored in.
  4. Nervous System Breakdown. This is a misguided attempt to improve forecasts by going into more detail and analyzing forecasts obsessively. Are your organization’s forecasts way too detailed? Is there always pressure to provide more details and more analysis? In today’s world of big data, it is imperative to understand that having more data does not always mean better decision-making. At the same time, more and more analysis does not mean revelation of the truth. Remember all forecasts are made up of assumptions rather than facts. Thus if the majority of your assumptions are wayward, no matter how much analysis you do, wrong decisions will be made with devastating consequences.
  5. Visual Impairment. This refers to the failure to provide enough forward visibility and discern trends in performance. Organizations that suffer from this problem focus entirely on the year-end forecast numbers to the marginalization of everything else. There is significant inability to see beyond the year-end, track trends and therefore make reasonable projections. This inability to see beyond the financial year-end often results in these organizations becoming vulnerable to shocks in the early months of the new financial period since they do not have sufficient time to take defensive action. This problem is particularly prevalent where financial incentives are tied to the achievement of annual goals.
  6. Lack of Coordination. The tendency to generate a large number of competing forecasts. In these organizations, there is enormous conflict, chaos and continual fire fighting between the different functions of the organization. For example, the way sales, operations and finance view the future is considerably different which in turn results in employees from these functions exhibit uncoordinated behaviour which makes it difficult for the organization to function effectively and efficiently towards the achievement of strategy. When your organization has a number of competing forecasts, performance cannot be sustained.
  7. Socio-Pathological Behaviour Patterns. This refers to involuntary encouragement of behaviour patterns that are damaging to the forecast process and to the health of the organization as a whole. In such organizations, there is widespread manipulation and distortion of information. Employees withhold knowledge until the truth becomes impossible to disguise or deliberately provide misleading information to managers and other decision makers. Forecasts are biased for fear of recriminations. In turn, unknowingly, managers reward bad behaviour by mistaking fabricated forecasts for good performance. This problem is predominant in environments with a culture that unwelcomes nasty surprises, punishes employees for telling the truth and rewards them for lying.

What are the other common symptoms of forecasting illness you have experienced?

I welcome your thoughts and comments.

Breaking Free From the Shackles of the Annual Budgeting Process

It is a fact that no one can predict the future with certainty. But does this mean that the management teams need to steer their organizations with a rear view perspective? The answer is a big NO. Management need to at least anticipate different future scenarios that the organization is exposed to and formulate effective strategies capable of addressing this uncertainty.

Unfortunately, most organizations remain tied up to the annual budgeting process. They spend months drafting the budget and then monitor performance against it. The problem with monitoring performance against the annual budget is that it makes managers focus more on hitting the numbers at the expense of the long-term interests of the business.

Instead of taking a long-term view of  enterprise performance and considering all the factors (Qualitative, Quantitative, Financial and Non-financial) that can help management make effective decisions, trapped into the shackles of the annual budgeting process, management end up making short-term tactical decisions that have devastating effects in the long run. Sometimes they just add a percentage point (for example, the inflation rate) to last year’s budget numbers to get to the current year’s budget numbers. The problem with this approach is that it ignores all the other important drivers of value creation and their impact on business performance.

By the time the separate business units submit their budgets for consolidation, most of the assumptions used to prepare these budgets are no longer valid. So what should organizations do in these turbulent and uncertain times? Instead of waiting for the future to present itself and then react to this future, organizations need to be proactive and adaptive. Sketching the future with a range of likely outcomes based on a variety of options helps managers make confident decisions and also enables the organization to respond rapidly to unpredictable events that can easily erode value overnight.

As clearly stated above no one can predict the future with certainty. I am not advocating that managers predict these events accurately. Instead, managers need to continuously look ahead and use all the information at their disposal to formulate decisions that maximise the potential of the business. This will in future help evaluate the alternative courses of action available to deal with negative events when they happen.

It is important to note that effective decision making is driven by information. The information needs to be timely, accurate and of reliable source. Today, various business intelligence and analytic tools can be used to capture, store, analyse and interpret vast amounts of data for sound decision making. When making strategic, operational and tactical decisions, management need not rely only on information about what happened in the past. They also need information about what they believe might happen as well and this information comes about as a result of effective forecasting.

Implementing scenario planning, rolling forecasts and driver-based forecasts helps management escape the perils and consequences of the annual budgeting process.  These tools help managers organizations anticipate the future, steer their organizations in the right territories and in turn drive business performance.

Without some ability to at least anticipate the future (For example changes in regulations, the economic environment, customer tastes, social attitudes, technological developments, political environment, competition and other industry and market dynamics.) it is difficult for the organization to survive. It is therefore important for managers to transform their planning and forecasting processes if they are to succeed in strategic execution, risk management and performance management.

Breaking free from the ropes of the annual budgeting process requires management to view the planning and strategy execution with different lenses. It is all about strategic change management. They need to present a strong case throughout the organization on why the current processes have run their course and need transformation. Effective forecasting is not a Finance function alone. Input from other functions is critical to enable a 360 degree view of the organization and drivers of value creation. Some of the factors pointing to the need to move from the static budgeting process to rolling forecasts and driver-based forecasting include:

  • Rapid changes in the modern economy. Today organizations can rise up quickly and at the same time disappear overnight because of failure to anticipate the future. The global economy and its organizations are now so interconnected that it can be dangerous to make wrong assumptions about the business environment more than a few months ahead.
  • Effective forecasting shields the organization from the drastic effects of today’s turbulence and uncertainty. Sometimes it is not the case that the organization is weaker or that the market is underperforming that leads to failure. It is simply that the systems management is relying on for decision making are outdated. Being unable to effectively forecast and respond to the future exposes the business to serious risk of loss and in extreme case failure.
  • Growth in amount of data. Amount of data available has increased. Adding a percentage point to last year’s numbers is misguided. It fails to take advantage of all the structural and non-structural data that plays an important role when it comes to effective decision making. Effective forecasting systematically and rationally helps managers assemble information that gives them visibility about what lies ahead in terms of likely outcomes, potential risks and opportunities.
  • Increased shareholder expectations. As providers of finance, shareholders are constantly looking for a satisfactory return on their investment. Should the organization fail to deliver on this it is most likely to see the back of its financiers. The investment community is always looking for quarterly feedback in the form of earnings reporting. Thus the assumptions used in the annual budgeting process need a constant assessment as failure to do so can leave the organization with an egg on its face. A profit warning as a result of failure to anticipate the future can drive down organization value immensely.

It is therefore important for managers to have a reliable projection with some ranges around it, a reasonable idea of the drivers of uncertainty and a compelling plan of how they intend to mitigate risks or exploit opportunities.

As the modern business economy continues to evolve managers must recognize the drawbacks of the annual budgeting process and importance and advantages of effective forecasting. It is also important to take advantage of credible EPM technological solutions in the market, if implemented correctly, allows managers to see over the horizon. These systems also help provide real time information that can be used for effective strategic decision making.

I welcome your feedback and comments.

Implementing Rolling Forecasts

In order to survive and drive business performance in today’s increasingly competitive and turbulent economic environment, organizations must be able to anticipate changes and be adaptive. Traditional annual fixed budgets no longer play the tricks. Instead, organizations need to implement new forecasting techniques capable of helping them anticipate changes and better inform strategic decision-making.

Avoiding total reliance on the annual budgeting process to monitor and drive business performance and implementing rolling forecasts can help business leaders steer their organizations in the right direction in these volatile and uncertain times. Rolling forecasts help organizations obtain reliable and relevant insights on enterprise risks and opportunities; identify and forecast the key business drivers continuously; evaluate business strategies and effectively and efficiently align organizational resources and processes for competitive advantage.

To successfully implement rolling forecasts, organizations must:

Base Forecasting on Key Business Drivers: Abandoning the fixed annual budgeting process requires business leaders completely making the decision and committing themselves to move towards the use of driver-based forecasting. Although no forecast is 100% accurate, forecasting business performance should not be done on gut feel, otherwise the results will be disappointing. To avoid actual performance deviating further away from forecast performance, all the key drivers of the business that are relevant for decision-making and informing strategic direction must be identified first. These drivers are both internal and external and help the business remain on top of market changes and challenges. This in turn improves organization-wide alignment, forecasting control and decision-making processes.

Align Forecasting With Strategic and Operational Decisions: One of the main objectives of forecasting is to evaluate business strategies, align organizational resources and processes efficiently and reduce inefficiencies.  Since the use of rolling forecasts helps the organization to continuously evaluate its operating environment, business leaders are to perform “what-if” analyses and evaluate current strategies under different scenarios. This in turn helps formulate alternative strategies, allocate capital and operational resources effectively and set new targets. Priorities are redefined for the operative processes, and adaptation measures and activities are proposed by operational managers.

Create Ownership of the Forecasting Process:  Organizations that have successfully implemented rolling forecasts have done so because they involve the various budget owners in forecasting. Directly involving budget owners in forecasting helps decision makers get a broader and more accurate view of the organization’s current position and future outlook since each budget owner is approaching the process from a different perspective. Furthermore, they have not viewed forecasting as a process done to adjust the annual numbers to fill the gap and meet the targets. They view forecasting as a continuous improvement process that is driven by changes in the organization’s playing field.

Implement Technology That Supports Driver- Based Forecasting: Since rolling forecasts work on various assumptions, there is need to invest in a system that can easily analyse, interpret, integrate all this information and play different scenarios to ensure sound decision-making. Data and analytics are essential for rolling forecasts. Organizations that want to make the transition must focus on relevant data and data-related processes. Predictive analytics can help analyze historical and current internal and external data, show what is happening and predict where the business is heading.

Embrace and Drive Process Change: Moving from the fixed forecasts to rolling forecasts is a cultural change initiative that requires proper senior management. It is therefore important for management to design an appropriate change management policy that is capable of driving the process change. For example, the change policy must clearly explain the reasons for changing, the communication procedures, the measures of success etc.

7 Best Practices & Principles Of Business Forecasting

The business economic environment as we know it is never the same all the time. Volatility is the norm. Commodity prices, foreign exchange rates, interest rates, inflation rates, population figures, unemployment figures etc are constantly falling and rising. All these indices have a bearing on business performance and with such high levels of volatility, the ability to make accurate predictions and act on them differentiates the winners from the losers. During earnings reporting periods, for example, it’s not rare that we hear news of certain organisations meeting their forecasts and others failing to meet their estimates.

Within various organisational departments, there are massive teams busy forecasting business performance and other indicators. It is true that no one can accurately predict the future, but then, it is better to be close to the future than be far away from it. For example, having an idea of who your most profitable customers or products and the revenues they bring is better than not knowing at all as this helps with planning and deciding on whether to channel extra funds to other investments.

Understanding what makes a really good forecast is key to meeting business targets and enhancing your competitive advantage.

• Forecasting is about decision making and understanding the businesses future. It’s about creating and shaping the organisations’ future.

• The frequency of preparing business forecasts should be driven by the rate of change in the key variables such as revenues, labour costs, travelling costs, advertising costs, telephone and other operating costs.

• Business forecasts should be free from bias and should have an acceptable level of variation.

• The accuracy of business forecasts depend on the ability of your business to properly keep records. There should be readily available data on what has occurred in the past and what the situation appears to be in the present.

• Good forecasts are not based only on accounting figures but also take into account local and global economic activities.

• Forecasting and planning are closely related. Your business forecast should come with plans of what you intend to do to achieve your targets.

• Do not rush to paint a picture of the period ahead without analysing all the facts. Have different possibilities and analyse your business under the worst case scenarios and have strategies in place to weather those conditions.

By following the approaches above, you are placing your business in a better position to seize future opportunities and avoid suffering huge loses in the future. Planning to react after the future unfolds is insufficient, instead, you need to act ahead of time so as to shape the future.