Steve Player’s white paper “Managing Through Change: The Power of Rolling Forecasts” highlights a lot of important factors to note about traditional budgeting and forecasting rules and modernizing them to fit your business and generate cash. Traditional forecasting rules definitely improve your business processes, but improvements can always be made. There are many general approaches that are taken involving forecasting. Forecasts are used to predict what may happen in the future–a way to determine whether or not a pre-determined target will be met.
Player identifies some pitfalls to avoid as well as ways to leverage success, a list of do’s and dont’s.
- Forecast to the wall
- “The most common pitfall occurs when a company forecasts to the end-of-period. Instead of being a discussion about organizational direction and the risks and potential opportunities in getting there, the conversation quickly turns to one of performance evaluation and a revalidation of whether managers agree to earnings commitments. The conversation cannot be about the future if the future ends when the period ends.”
- Confuse Forecast with Target
- “Targets are aspirations or goals converted into quantified targets. Forecasts highlight a company’s direction.”
- Insist on Forecast Accuracy in an Unpredictable world
- The business environment today is chaotic and unpredictable. We can’t control the future. It’s more beneficial to focus on how to quickly react to change, not on how to control the change.
- Forecast with Spreadsheets
- This leads to excessive time wasted, and creates too much inefficiency. There are tools out there that can simplify these processes greatly.
- Use today’s tools to visualize results
- Today’s reporting tools allow for visually appealing, easy to understand, graphical analysis. This is dynamic and beneficial.
- Focus on critical drivers, avoid excessive details
- “The more detail an organization pumps into its plans, the more variances it needs to calculate and explain. Leading companies focus on the critical drivers that determine whether they will be successful.”
- Match your forecasts with your ability to see
- “One of the key benefits of adopting rolling forecasts is that management can focus on understanding the degrees to which they control the future, as well as the external events that force them to react.”
- Use different time horizons for different decisions, but integrate systems
- “Operational functions are engaged in short-term sales and operations planning to make sure current orders can be fulfilled in a timely manner.”
- Move to advanced planning approaches
- Continually planning has even replaced annual budgeting processes for more advanced firms.