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The Resource for the Global Finance Profession

Forward Thinking: FP&A Guide Addresses Forecasting Challenges

  • By Nilly Essaides
  • Published: 2013-07-10

Better forecasting is one of FP&A professionals’ chief challenges. Recent studies by the Hackett Group and KPMG demonstrate that the majority of senior financial executives are targeting FP&A and forecasting as their top priority for improvement in the next two to three years. In response to practitioners’ needs, AFP published the AFP Guide to Forecasting: Best Practices for Common Challenges, which highlights two key trends. First, while forecasting is harder to do today than five years ago, not many companies have made significant changes to the process over the same period. Second, many more companies are planning to do so.
“Every year we poll our CFOs about what changes they anticipate. In 2013, over 70 percent of participants said they’re going to make changes to their forecasting and modeling capabilities,” said Tom Willman, associate principal and global practice leader for the Finance Executive Advisory Program at the Hackett Group. A KPMG survey released in late May supported these findings. KPMG determined CFOs’ No. 1 priority in the next two years is improving business planning and forecasting. Sixty percent of respondents also said that management reporting and analytics is among their biggest near-term priorities.

Improving scenario planning

Many of the experts interviewed for the AFP’s new forecasting guide said that one of the biggest issues they face is forecast bias, whether because the process is politically “contaminated” or it is too static or insular.

That runs counter to FP&A’s chief mission: to provide management with intelligence to drive better decision-making. That’s where competitive intelligence (CI) can help FP&A directors devise more accurate and forward-looking assumptions about the market and competitors to improve scenario analysis. “[This connection] strikes a chord with me,” said the VP of finance at a major U.S. technology company. “FP&A is critical for implementing strategy.” To do so, “FP&A has to understand how strategy works and take action with respect to it,” he said. “CI needs to fit into FP&A or at least work together. The purpose of CI is to help make adjustments to strategy to make it more effective. Somewhere the two [FP&A and CI] need to meet.”

That does not necessarily mean CI needs to reside in the FP&A group or report to it, according to this FP&A veteran. “Typically it doesn’t,” he said. At his organization, CI reports into strategy. However, “for FP&A to be effective, it can’t operate without knowledge of what is happening within the CI group, because CI will draw conclusions about strategy and how it’s effective.”

Ben Gilad, president and co-founder of the Academy of Competitive Intelligence, agrees. “There’s no doubt that forecasting should interact closely with the competitive intelligence analysis,” he said. Unfortunately, that’s not often the case. “FP&A and the controller office are financially oriented. They generally don’t understand competition,” he said. “They are looking at financial available data and fit into quantitative models that by definition make it difficult to take into account competitors’ action.” Many companies neglect to look at external market factors or examine mostly macro- and microeconomic trends, not the possible activity in their market.

Adding CI to the mix means adding qualitative aspects which, in the best case, are translated into financial effects, i.e., what’s the likely impact of a competitor’s new product launch? CI is not a science. “You have to do the back-of-the-envelope analysis, not the econometrics model. You need to make qualitative judgment,” Gilad said. Financial planners and competitive intelligence functions should work together. Where you find that connection, you find that the function has been elevated to a strategic level. It takes the term strategic financial planning and gives some context to the slogan.”

Download the AFP Guide to Forecasting: Best Practices for Common Challenges here.

Copyright © 2015 Association for Financial Professionals, Inc.
All rights reserved.

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