As a former CFO and analyst at PwC, I’ve learned to respect what Deloitte says about a topic, especially when that topic is near and dear to me like financial forecasting.
Check out Deloitte’s analysis about financial planning and forecasting in today’s environment. Although it’s short, a few things jumped out at me.
Five Horsemen of the Forecasting Apocalypse
The five forecasting challenges that CFOs and FP&A teams face, according to Deloitte, are:
- Constant scenario development and modeling
- Discomfort and lack of confidence in future projections
- Urgent need for decisions and courses of action
- Unclear decision-making framework and ambiguous criteria or triggers for contingencies
- Excessive and resource-consuming manual iteration
Do You Have the Tools That Rule?
More than any other piece of corporate culture, a company’s tech stack may determine whether they can predict the future accurately.
The days of PowerPoints and spreadsheets are long dead. If this is how your company produces financial forecasts, you might want to look for an exit strategy.
Whether you call it enterprise resource planning (ERP), or enterprise performance management (EPM), you need to make sure you have all the tools your team needs to create a detailed and accurate financial forecast.
The Texas Sharpshooter vs. Really Hitting Your Targets
In data science, there is the Texas sharpshooter fallacy, where someone randomly shoots the side of a barn, finds the biggest concentration of bullet holes, and then draws a bullseye around it. Financial planners do this all the time.
Planners are driven by the past to set targets based on old bullet holes, instead of trying to achieve a challenging fresh target. This limiting forecasting model hurts everything from establishing reach goals to various performance-based compensation schemes.
You’re Not Trying to Hit the Lotto Numbers
The true purpose of financial forecasting isn’t hitting the quarterly numbers exactly so you can win the office betting pool.
Financial forecasting is a tool to map out possible futures that your company can undertake. In many cases, people forget that the purpose of financial forecasting is to empower you to thoughtfully chart a new course of action.
Just having a low, medium, or high forecast isn’t enough; you need to create forecasts that are based on different triggers, organizational drivers, or economic contingencies. This helps you war game for whatever comes your way. The right AI software can sift through thousands of these possible futures in real-time.
You’re Not an Island
There are macroeconomic factors that can impact your sales. There are internal factors as well. You need to get a handle on your forecast variance based on both the internal and external factors.
Look back at where a previous forecast was wrong to fine-tune your variance in the future. Machine learning can sometimes reveal hidden patterns that you hadn’t seen before.
The Drums Are Beating Faster
Everyone is working on internet time these days. There might have been a time when quarterly forecasts were good enough. Not anymore.
At the very least, you will now have to report on forecast-to-actual variances on a monthly basis. Deloitte says the need for real-time predictive forecasting using AI “is quickly transitioning from a ‘nice-to-have’ productivity advantage to a foundational finance capability.”
At ForecastEra, we saw these changes coming years ago.
These insights were part of our driving motivation to build both Revenue Forecast Navigator and Sales Forecast Navigator. These products are designed to take a variety of inputs in real-time to allow CFOs and FP&A teams to nimbly forecast using a variety of methodologies over various time frames.
We have designed these products to work seamlessly with Salesforce so that companies with large sales teams can automatically align their up-to-the-second sales pipeline, projected recurring revenue, and external factors to give you the most actionable insights available.