Financial Forecasting Is Broken—Here’s How To Fix It

Financial Forecasting Is Broken—Here’s How To Fix It

When it comes to financial forecasting, you might find yourself in a reality different from the one you predicted in your last forecast—despite spending most of your time trying to get it right. Coupled with the time-consuming nature of the process, starting from scratch after having poured through tremendous historical data can be exhausting. 

“Only 1% of organizations achieve 90% forecasting accuracy 30 days out,” says Ashish Pareek, VP and Head of Financial Planning and Analysis (FP&A) at Jackson Hewitt Tax Service Inc.

Many CFOs run multiple projections based on historical data but fail to consider external factors that not only materially affect forecast updates, but also create significant cash flow fluctuations. While you can’t control the market, proactive planning with technology can help you ensure your financial forecasts are realistic and still support the big picture.

Factor in External Factors, Not Just Historical Data

Finance teams often make the mistake of relying solely on historical data and linear analysis to create annual financial forecasts. The problem? These forecasts may no longer be relevant six months later, whether that’s due to market volatility or changes in consumer behavior. 

“No one [in Finance] is explicitly discussing how external factors and impending market shifts could affect forecasts,” says McKinsey Partner Ankur Agrawal.

Many companies had to rethink their financial forecasts and budgets when the pandemic hit because they made assumptions about the future based on the organization’s previous years’ performance. To make future projections, relying on past financial data alone renders the predictions inaccurate and unreliable.

“A better approach is to create a market-momentum case that relies on internal and external data as well as end-market trends to build the forecast,” Agrawal continues.

To best prepare for unforeseen situations, we recommend financial forecasting by conducting scenario analyses that consider external factors—including the unexpected, worst-case market scenarios. This planning allows finance teams to proactively address potential problems when things don’t go according to plan.

Invest in a continuous planning platform like Planful and build what-if scenarios and rolling forecasts in minutes, so no more late nights or crunch time trying to build financial forecasts to meet a tight deadline. Instead, finance teams can focus on the work that matters: uncovering the strategic value of the data through analytics. 

Collaborate To Check Your Assumptions

Financial forecasting is a challenge when finance teams are dealing with data silos. Finance professionals need to understand other departments’ performance and goals to make accurate forecasts. Wrangling data from other business departments, be it sales figures or marketing expenses, can quickly become frustrating. 

When information is difficult to access, it’s tempting to make projections based on guesswork. Don’t fall for that trap. Instead, start by opening the line of communication between Finance and other business functions. You’ll increase visibility into other departments’ numbers to check your assumptions about goals and financials.

“[The key] is how we react when the forecast needs to change,” says Paul Rogan, former Group CFO at Challenger Financial Services. “It is about taking actions, getting executives and management thinking about both upsides and downsides, and responding appropriately.”

Communicate with business leaders—CIO, CMO, COO, CTO, and CHRO—to ensure operational activities support financial goals and vice-versa. Use technology that makes collaboration between Finance and other departments simple and efficient. Doing so will not only help you avoid misalignment but also get you closer to creating more accurate forecasts. Moreover, CFOs are in the best position to enable better collaboration between Finance and other business divisions.

“CFOs who have embraced collaboration tools such as cloud services, social media platforms, and other app-based solutions facilitate timely engagement with team members, stay up-to-date with the latest internal and external developments, and respond quickly to critical business signals,” says Bob Yap, Partner, Head of Deal Advisory, Asia Pacific at KPMG Singapore.

Our FP&A platform helps finance teams avoid data silos. Through data integration, you can view financial and non-financial data right on the platform. You’ll have access to high-level as well as granular data, all from a single source of truth.

To ease the breaking down of data silos, Planful offers robust, two-way data integration capabilities. Organizations get access to information from ERP, HCM, CRM, data warehouses, spreadsheets, and many other sources—both on-premises and cloud-based. You can trace each input to its source, assign responsibilities, and collaborate with other teams through the dashboard. 

Use Automation To Help Finance Teams Efficiently Create Forecasts

Financial forecasting isn’t always an efficient process. Many teams spend large amounts of time creating predictions that aren’t entirely reliable, and with tight deadlines, the process often causes finance teams to burn out

The data backs up this claim. Many CFOs say “their forecasts are not particularly accurate and that the process takes far too much time.” In terms of time, an APQC survey found that “the fastest 25% of organizations can prepare a financial forecast in eight days or fewer, while the slowest take 16 days or longer.”

Automation can help you efficiently build financial forecasts by improving data accuracy and easing the burden on finance teams. Many finance teams are already picking up on this trend. For example, KPMG found that 42% of respondents highlighted the need to automate the financial forecasting process as the top priority.

Keep in mind, automation doesn’t eliminate the need for human intelligence. It empowers finance professionals to focus on the high-level projects where they’re needed most. While automation provides finance teams with more accurate data, finance professionals still need to evaluate and translate the information into recommendations to support business decisions. 

Planful uses predictive language to automate repetitive data entries, removing the need to enter redundant data in cash flow forecasts. As a result, the platform saves finance teams time and reduces errors caused by manual copying and pasting. So you can build forecasts in hours, not days.

“We use [Planful] to do our quarterly forecasting, budgeting, and financial reporting,” says Mike Petrauskas, Manager of FP&A at Elgin Equipment Group. “It has eliminated much of the time we previously spent consolidating Excel spreadsheets. It has saved our plant controllers, corporate controller, and myself hours of time each month.”

Boost Your Financial Forecasting Accuracy

In a post-pandemic world, finance professionals can’t rely on historical data alone to create forecasts. To form precise predictions, you must account for external factors and other departments’ data and goals. You can try to balance all these elements manually with spreadsheets, but it’s time-consuming and error-prone. 

On the other hand, a powerful FP&A platform with financial forecasting software, like Planful, supports continuous planning and can assist you in this process without consuming days of time. With the data at your fingertips exactly when it’s needed most, businesses can respond to market shifts and uncertainties much faster.

Curious to learn what else Planful can do to help your team work better? Contact us for a demo. 

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