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How to manage your forecast effectively

21st December 2015

Financial forecasting was brought to the fore this summer following the discovery that almost half (47%) of finance officers working at some of Europe's largest financial institutions will not meet the International Financial Reporting Standards (IFRS) 9 deadline by 2018. IFRS accounting financial performance standards are now used by more than 100 countries, including two-thirds of the G20. It has been a rewarding year for many professionals, however, following a year of forecast cuts and budget blow-outs, it is clear that not everyone is up to speed on how to forecast effectively. Here are a few pointers to stay afloat in the year ahead.

Forecasting fundamentals

Prediction and forecasting should treated as two separate disciplines: prediction is centred on future certainty, while the latter is based on current financial signals that can be utilised to steer a company in the right direction. Forecasts must be logical but accountants must be aware of the many elements of uncertainty, both at home and abroad that will affect the accuracy of a forecast. According to Paul Saffo, a leading technology forecaster based in Silicon Valley, total accuracy is very difficult and at times impossible. If you head straight toward accurate forecasts, a company may end up in a worse situation by throwing caution to the wind and overlooking a few fundamentals.

Rather than seeking out a definitive answer, effective forecasts should managing change and perfect the art of balancing expectations, budget and what's really happening on the ground at multiple points throughout the year.

A variety of benefits

There are a variety of reasons to manage your forecast correctly, but one of the biggest to learn from is knowing where your cash flows actually are and how they fit on your revenue growth trajectory. Those who are familiar with financial forecasts will know that investors will use this information to consider the best metrics to use when they offer financial terms to a business.

Good forecasters can demonstrate the financial viability of a business and can set up a stable framework that identifies risk areas from an early stage. Potential cash shortfalls can also be caught early to help manage the budget delegation.

How to manage your forecast

When your forecast starts to eclipse or fall away from a budget, this is a clear indication that you need to reforecast in order to establish the real scope of future opportunity. Reforecasts are usually conducted mid-year but they should actually be held every time performance and budget differs significantly.

Forecasting is not an attempt to throw out a budget. They should be used by the company to assess its performance against the budget and act accordingly, and management forecasts should sit alongside the budget to show what is predicted to happen.

The process is relatively simple: the model used for budgeting should be used a template for each revision of revenues and costs. However, there are a few rules to establish an effective process:

• Communicate effectively with those who control the budget. Companies choose to ignore or include the forecast into the business strategy based on whether they would like to increase business investment for growth. Understand all viewpoints to make an overall assessment.
• Short-term and long-term uncertainties should be mapped or drawn to increase transparency and understanding of what risks may lie on the horizon, for example a fall in oil prices, asset shifts or policy changes overseas.
• S curve: financial change usually follows an S-shaped line rather than a simple, straight one. Look for a slow start followed by a lull as this can be an indication of a potential bubble or explosion in the near future.
• Include anomalies - anomalies may not look pretty on a spreadsheet or please your stakeholders, but they are important measurements that could indicate the next new challenge or lucrative trend.
• Do not over rely on one set of statistics or area in your forecast because it fits into a trajectory that the business is happy with. Overlooking weaker areas in your forecast is misleading and can send a business off on a wrong tangent. As a rule, a substantial amount of 'weak information' should be trusted more than a few strong points that are pleasing to the eye.

Grafton Banks are specialists in the provision of accountancy and finance staff to businesses and practices in Sussex and Surrey. For an in-depth and confidential consultation about jobs and careers in finance please contact Nigel Jeyes on 01273 229499 or email nigel@graftonbanks.co.uk. We look forward to hearing from you.