The end is nigh: time for a reforecast
Events in Japan will prompt many organisations to revisit their forecasts. CIMA thought leader Peter Simons wonders whether they have the right tools to hand.
As the dreadful events in Japan unfolded, many accountants will have been asked for re-forecasts as a matter of urgency. The budgeting cycle can take several iterations over a period of months. How can we ensure the accuracy of forecasts prepared in a hurry?
Clearly, a budget or forecast would be pointless unless there was a concrete plan to take action and deploy resources to achieve it. Likewise, a budget or forecast derived by flexing the lines in the accounts is unlikely to be realistic. A keen understanding of revenue and cost drivers is required to ensure the accuracy of a forecast - and accurate forecasts are necessary to maintain the confidence of investors and bankers.
Too often, the budgeting or reforecasting process rests on business managers completing and returning a financial template, usually an Excel spreadsheet, within a tight timeframe. This leaves little time for conversations about the assumptions or drivers that are so necessary to lend credibility to the resulting figures.
Hopefully, nobody will have overwritten calculations or data sources in their spreadsheet. But caution, optimism, gamesmanship and the organisation’s situation and culture all have a big influence on forecast entries.
Second-guessing and scaling back have sometimes been the only solutions to set a budget that can be delivered with some certainty - although the range of possible outcomes with their varying degrees of probability is unlikely to have been considered.
Better information is needed to survive a recession and thrive afterwards
Research over many cycles has shown that the organisations most likely to emerge successfully from any recession are those that balance cutting costs to improve operating efficiency with continuing to invest to develop their competitive position .
Using financial measures alone to budget, forecast or manage performance is merely “painting by numbers”. Long term value creation is a greater challenge than meeting budgets. Achieving both at the same time is an art that requires a combination of financial expertise, business understanding and strategic reasoning. It also requires better information – or business intelligence (BI).
In the current economic climate organisations could harm their long term prospects by cutting investment in competencies they will need in the future. Planning and forecasting can help a business respond promptly to threats or opportunities and ensure its survival. Failure to invest in better information systems could be a false economy.
A few years ago, the major vendors of operating systems and databases such as SAP, Oracle and IBM recognised that planning, forecasting and performance management demanded financial information that linked to operational and customer information within their systems and beyond. These vendors acquired the leading performance management software companies Business Objects, Hyperion and Cognos so they could offer integrated BI suites.
Lots of other software companies offer good BI tools which work with these vendors’ software including Microsoft’s. And the mighty Microsoft has developed a BI offering too. But better information is not always about business intelligence. Strategic thinking with a notepaper and pencil or using spreadsheets for innovative analysis may suffice.
However, when producing reports and analysis on a regular basis, software can be more efficient and carry less risk of error than spreadsheets. BI tools come into their own in large scale businesses or in sectors where lots of data is captured. Aviation, banking, insurance, retail and on-line businesses have been the pioneers of BI. Other sectors will follow as BI becomes less expensive and Cloud computing bring BI tools within the reach of smaller organisations.
Our IT colleagues have the expertise to deliver the technological solutions but are not well placed to help realise their benefits. Management accountants have important roles to play if the potential in BI is to be unlocked:
- Developing the business case and a plan to realise the benefits with firm commitments from those who are expected to deliver the results.
- Implementing successfully with buy-in from those who will be using the system.
- Ensuring data quality, particularly the integrity of the ‘master data’ considered necessary to inform business decisions.
- Tracking the right metrics and providing analysis to manage performance.
- Conducting in-depth analysis to support evidence based decision making.
In today’s global economy, unexpected events, whether domestic or from a distant country, could affect customers, suppliers, competitors or regulation so tactical planning and re-forecasts may be required.
Investing in BI to improve the ability to budget and reforecast accurately could be an important forward for any organisation that needs to respond swiftly to developments within its markets.