In today’s turbulent markets, ‘speed to insight’ is incredibly important, yet combining speed and insight has proved elusive for many enterprises. In the face of uncertainty many companies are reforecasting more frequently (71% reforecast more than twice a year) but FSN’s research, The Future of Planning, Budgeting and Forecasting, finds that such an approach is misguided and has little impact on forecast accuracy or the ability to look out further into the future.
We call it the ‘hamster wheel’ effect. The wheel is turning faster and faster, but the hamster isn’t moving anywhere. And that’s because nothing has changed. If businesses want to increase speed of forecasting and insight, then the research says they have to change the way that they forecast.
Usefully the research sheds light on what they need to do. Some of it relates to technology but just as importantly there are non-technology issues as well. From a technology point of view, it is essential to use a specialised planning, budgeting and forecasting application yet 70% of businesses are heavily dependent on spreadsheets. These spreadsheet-bound processes are too slow and inaccurate and neither do they provide the basis for collaboration that is so vital for stakeholder engagement and driving insight through the business. Yet only 16% use specialist on-premise software and just 10% have implemented specialist cloud-based software across their business units.
Spreadsheets are also a blunt instrument for analysis. Our research shows that even the most advanced use of spreadsheets such as pivot tables has little impact on insight. The key technology driver for insight is in fact data visualisation, i.e. graphic presentation of data with drill down that enables financial and non-financial managers to work together to understand what is driving the business’s performance and its prospect for the future.
However, the most profound impact on the insightfulness of forecasting comes from a surprising source, namely, non-financial data. More than 50% of organisations that regularly use non-financial data are able to forecast earnings between plus or minus 5% of forecast compared to just 29% where organisations reported they were not making more use of non-financial data. Furthermore, users of non-financial data were more than twice as likely to be able to forecast beyond the 12-month time horizon. Yet despite its potency, only 11% of companies have increased their use of non-financial data in the last 3 years.
Rolling forecasts are another non-technology approach to improving the speed and insightfulness of forecasts. Finance functions that have adopted rolling forecasts (i.e. forecasting on a continuous 12 month rolling basis) are more than one and a half times more likely to be able to reforecast the whole organisation within a week, and four times more likely to respond more quickly to market change.
So technology such as specialised forecasting software and data visualisation tools are important to insightfulness but smart CFOs know that accounting technique such as rolling forecasts and using non-financial data are just as important.
You can hear more about the role of technology in forecasting in a short video clip here.