Nowadays, CFOs must be able to adapt quickly as the corporate landscape is constantly changing and new financial methods are emerging. By examining and revising their financial predictions on a regular basis, they may spot potential risks and opportunities early on and make the appropriate modifications to their company's financial goals.
Our recent Finance Trends Report found that, of the finance professionals surveyed, 32% are looking to implement some form of predictive analytics technology within the next 12 months. This goes to show that there is a clear understanding of the growing importance of accurate financial forecasting.
Moving forward, innovative CFOs should research how to further improve forecast accuracy and pursue forecasting best practices if their business is to thrive.
Why is it important to improve financial forecasts?
CFOs and finance leaders can make better data-driven business choices with solid financial forecasting methods. For example, establishing a regular routine of producing a monthly financial projection can help with planning for financing, operations, and budgeting.
The aforementioned Trends Report also highlighted that 78% of finance professionals are concerned that economic conditions will impact their organisation’s profitability over the next year. As a result, enhancing the accuracy and efficiency of financial forecasting represents a crucial objective to strive for.
Furthermore, a solid forecasting procedure facilitates an organisation's ability to see its future based on its activities and intentions. With this insight, CFOs and their teams can better assess growth prospects, anticipate threats to strategic objectives, reallocate resources throughout the year, and meet cash flow requirements.
Better forecasting: 7 tips to improve your forecasting process
1. Establish a reliable data foundation
To succeed, businesses must deploy accurate, harmonised, and standardised data throughout the company. Ideally, this data should be gathered and evaluated by automated processes, and they should not limit themselves to looking at data from their own organisation's past.
Instead, they should also find and integrate external factors that might have an impact on future performance, such as demographic trends, changes in customer behaviour, and macroeconomic issues.
Not only will forecasting models improve as more data is added, but they will also better adapt over time to the shifting landscape of the market and economy. To put it another way, models must determine if other internal or external factors are more significant and adjust accordingly.
2. Automate the forecasting process
Automation continues to liberate finance teams by streamlining processes and taking control of repetitive tasks. There’s no reason why this shouldn’t be applied to forecasting too. Some finance teams continue to use spreadsheets for this activity but there are systems with automation capabilities that can drastically improve outcomes.
Automation boosts efficiency and saves time for finance employees so they can focus on deeper analysis and strategy. Not only this but it creates a higher quality of forecasting too, as human error becomes a thing of the past, which leads to better data. More information can be processed at any given time, leading to highly accurate data that can be used in powerful ways.
3. Commence with a proof of concept
Instead of attempting to execute an impossible endeavour with unknown outcomes, businesses should first begin with a proof-of-concept project, something focused or isolated, such as a single line of stock or target region. This will allow them to test and reform the forecasting process, which in turn will become quicker and more accurate over time.
This will help to generate a hypothesis that can be proven or disproven using quantitative evidence. Starting from that point, they will be able to broaden the scope of their forecasts as their skills increase. Longer term, companies may select how best to utilise information technology, global business services, or other organisational features to apply this proof-of-concept throughout the company. This involves customising data, procedures, and technology to match the requirements of various business units.
4. Consider multiple scenarios
Include several potential scenarios in the prediction. CFOs may use this to better understand how the company's financial performance could be affected by various circumstances. In this pursuit, they may provide a baseline prediction based on the scenario that is the most likely to occur, in addition to alternative scenarios that consider possible risks and opportunities.
5. Deploy historical financial data
To inform the prediction, previous data and trends should be used. CFOs may benefit from this since it makes it easier to see patterns and trends that can be utilised to create more accurate projections. However, it is essential to also consider non-financial elements that have the potential to influence the projection, such as changes in customer behaviour or the emergence of new competitors.
6. Devise practical and actionable insights
The true value of accurate projections comes into play when forecasts guide company choices that aim to enhance future performance. To be a successful, collaborative partner to the business, finance functions must concentrate their forecasting on a limited number of indicators that matter (the underlying drivers of the company) and use visualisation tools (such as Advanced’s Business Intelligence Software) to put this information in the most understandable manner for key business stakeholders.
7. Review and update
Maintain a routine of regularly reviewing and updating financial forecasts and predictions. The business environment is in a state of constant flux, so it’s essential for CFOs to regularly examine and update their projections to ensure they’re correct and continue to be applicable. This may assist CFOs in identifying possible risks and opportunities early, allowing for the appropriate modifications to be made to the company’s financial plans.
Financial forecasting methods
There are two primary financial forecasting methods: qualitative and quantitative. Many CFOs utilise a mix of qualitative and quantitative methodologies to get the most precise and dependable forecasts. This can assist with guaranteeing that a variety of views and aspects are included in the prediction. In addition, CFOs must frequently examine and revise their projections to reflect changes in the environment.
To create forecasts, qualitative forecasting systems use subjective judgement and expert opinion. This method is often used when previous data is insufficient, or the future is deeply uncertain.
- Scenario planning - Forecasting based on anticipated future outcomes requires the development of various alternative scenarios. For instance, a CFO may develop a baseline scenario based on the most probable future and alternative scenarios that consider prospective risks and possibilities.
- Delphi method - This method involves assembling a panel of experts and soliciting their forecasts for the future. The panellists' replies are gathered and sent to the group while maintaining their anonymity. This procedure is continued until the group finds a future that they all agree upon.
- Judgmental forecasting - Utilising the knowledge and experience of people to make predictions is known as judgmental forecasting. For instance, a CFO may engage with industry experts or department heads to get their perspectives on future market trends.
Quantitative financial forecasting techniques anticipate the future financial performance of a company using mathematical models and historical data. This strategy is predicated on the premise that historical patterns and trends will persist into the future.
- Time series - Analysis of past data to uncover trends and patterns that may be utilised to generate predictions. For instance, a CFO may use time series analysis to anticipate future revenues based on historical sales data.
- Regression analysis – Using statistical methods to determine the connection between several variables, CFOs can then make predictions. For instance, it is possible to anticipate future profits based on sales and costs.
- Monte Carlo simulation - This involves developing a model that simulates a variety of probable outcomes depending on random variables. This may assist CFOs in understanding how various circumstances can affect the organisation's financial performance.
Deploying better financial forecasting for business
Ultimately, better financial forecasting assists CFOs with managing their company's financial performance, and it empowers them to make choices that contribute to the business's long-term success.
Cloud-based technology is one of the most viable avenues for businesses when enhancing their financial forecasting, as it helps to predict future revenues and expenditures across the whole organisation. As a result, precision is increased by eliminating the mistakes that come with manual budget planning.
Innovations in Cloud computing and application programming interfaces (APIs) offer the ability to move bank-level operations to the C-Suite, allowing for better real time forecasting over static models. Our Cloud-based accounting software, Advanced Financials, is a cutting-edge solution that enables finance teams to improve their forecasting and financial trend analysis.