October 2, 2020
Corporate Finance Has Only Two Key Jobs – Financial Forecasting Is the Second One
Posted by John Kogan
It’s pretty simple – corporate finance does tons of stuff but is fundamentally here to help companies:
- Better know themselves
- Chart a path to their best future
In an earlier blog post I covered better “knowing thyself” through financial analysis and reporting. This post focuses on putting that knowledge to good use.
If the information gained through analysis and its attendant reporting is key to knowing oneself and to potentially better performance, it needs to link directly to “charting a path” to a company’s best future in order to be of true value. That path is the financial forecast.
Your Economic Path to Success
The forecast is a bit of magic. It lets you see the future without the pain of actually living through it. Then it lets you alter your future before you get there, leading to better decision-making along the way and better outcomes, regardless of your end goals. A forecast is your economic path to success, and too few companies pay it due respect.
A good forecast takes the best knowledge of products, markets, company capability and even the economy, and pours it into an understandable set of driver-based assumptions around revenue, cost of sales, operating expense and funding. The result is an economic model with built-in reporting and metrics that can be used by business leaders and stakeholders alike to both understand and drive toward that great future.
The forecast never sleeps! It needs to be updated every month, because we’re constantly learning and our world is changing every month. Thus, it should be a “rolling” forecast. Without it, you’re just running on gut feelings. I’ve seen some highly predictive guts before, but typically, they are far overmatched by the sheer volume of data available, and thus make a lot of mistakes. The forecast takes the future away from gut predictions and makes it more data-based.
A Budget Isn’t a Forecast
That’s not to say there’s no place for instinct, but wouldn’t you rather have GPS and a map in lieu of a blindfold and cane? And please don’t use the word “budget” interchangeably with “forecast.” It’s rare that a budget stays germane after about its second month in use. Yet many companies put such effort into a budget that it requires months to create, and through the passage of time in the creative process, it’s often out of date before the budget period even begins.
Don’t bother. Build a forecast and commit to its care and feeding. Once you have this dependably in place, you can simply “freeze” it at any point in time and use that frozen version as a budget to compare against if so desired. More advanced finance organizations compare every forecast to the last in an ongoing waterfall analysis that leads to better visibility of forecast accuracy and, ultimately, to better forecasting capability.
Use the Appropriate Tools
As usual, technology can be a great enabler in forecasting. Yes, the miracle of Excel is great for forecasting, but it’s really only suitable for smaller entities. Once your business gets too complex, it’s definitely time to consider purpose-built forecasting tools, and happily there are many available.
From smaller-company-focused tools like Sage Intacct Budgeting and Planning to larger-company solutions such as Adaptive Insights and Solver, among others, these platforms are built to plug directly into your company’s core financial system to automatically pull your past results and chart of accounts into a forecasting “framework with guardrails” and workflow. This makes it far easier to manage the forecast without errors, with more distributed input, and with far more checks and balances.
When the going gets complex, you really want the right forecasting technology, because it makes a difference. Remember to find the right partner here, because proper setup makes the entire process run more smoothly and delivers more power to your forecast.
Okay, so when does finance get to do the “tons of stuff” mentioned earlier? Well, it’s getting done daily. It’s part of every analysis and report and forecast, like the roots supporting a tree. But it should all be done in service of the two overarching goals: knowing thyself and charting a path to your best future. If it’s not, simply stop doing it. Experiment, be impatient to learn more, and always look to apply that knowledge to a better future.
The financial forecast is key to reaching your business’ goals. The forecast is the map that puts all company operations in their proper order, allowing for analysis, pre-correction and optimization of every move you make. That’s finance done right.
To learn more about strengthening your corporate finance function, visit our FP&A page to see how our experts can help your organizations.
John leads the Finance Performance Improvement practice, where he helps clients with strategic finance outsourcing, executive search & finance technology solutions. He is passionate about helping CFOs become strategic leaders and make the finance organization a genuine weapon for their organizations.