With modern budgeting, forecasting and planning technology, re-forecasts can be produced, sliced and diced faster than ever before. Consolidations and collections of inputs that previously took days can now take minutes or even seconds. For an FP&A professional, these tool kits in their infancy provided a fantastic relief in to ever increasing workloads. However, executives and senior management are now aware of these tools and demand re-forecasts weekly, daily, or even multiple times a day.
What kinds of trade-offs exist when forecasts and iterated at such a frenetic pace?
Thoughtfulness and insight . In the past, forecasts were often completed at a high level, such as a “back of the envelope calculation” since the ability to perform detailed calculations quickly did not exist. This forced executives to debate issues and try to achieve solutions that were perhaps 90 percent accurate. These executive discussions are really the heart of the forecasting process, not necessarily the details in the numbers, since all forecasts are based on estimates and judgments in the end. With the ability to consolidate detailed forecasts quickly, there is the risk to get lost in the details and also lose sight of the big picture. The purpose of effective forecasting is to deliver meaningful insight to drive decision making, not to estimate the cost of office supplies with 99 percent accuracy six months from now.
Distraction from other responsibilities . The ability to incorporate small changes into a forecast quickly has greatly increased with modern technology. Items that were in the past deemed immaterial can now be considered as relevant for the latest re-forecast. However, the time saved from faster consolidation can easily be lost to multiple iterations and small improvements of the same forecast. Furthermore, work on other important priorities can be interrupted many times when multiple a five-minute forecast update is requested. The interruptions can cause distractions, such that the speed of the forecast tool actually becomes a liability.
Quality, i.e. haste makes waste. Unrealistic expectations of turnaround time can lead to doing things too quickly, leading to errors and mistakes.In earlier times, the effort required to calculate, consolidate and assemble the data allowed the analyst to build in some cushion for careful review. Managers and executives who have spent most if not all of their careers with powerful forecast technology available now expect fast turnaround times. Those who advance to higher levels usually excelled at timeliness and accuracy earlier in their careers, and therefore might not realize the time required by some of their analysts to review information and correct errors and check for other inaccuracies.
Version Control. Modern forecasting technology allows for multiple iterations of a potential budget or forecast. Yesterday’s manual and slow processes limited the number of versions of a particular year’s estimate. A typical company might have had just three full-year forecasts: the original budget, a revised budget, and a mid-year forecast. Nowadays most organizations have at a minimum multiple versions of the budget and quarterly forecasts, and many have monthly forecasts for the financial statement and weekly forecast updates for sales. The challenge is to manage each of these forecast versions and to properly understand and explain variances to the prior versions. A typical variance report might show the actual results versus three baseline periods: the most recent forecast, the budget and the prior year. Confusion can set in when management is not sure which version of the forecast is the “most recent.” It might be common during a re-forecast process to tweak the numbers 10, 20 or even 30 times before the work is considered final. Preparing a “bridge” to prior drafts of the forecast becomes a time consuming exercise and conversations focus on which version of the forecast is the “right” one, instead of a more value added discussion.
Organizations are not going to go back to older technologies in spite of any challenges one faces with new technologies—the benefits from faster and more robust forecasts are too great to ignore.
The lesson for FP&A professionals: The key to a successful forecasting process is to define it up front and effectively manage it. Set clear expectations on how often the forecast will be updated, how it will be communicated, and the process of managing drafts from inception to completion.
Like other technologies such as e-mail, it is easy to become overwhelmed by the speed and volume of information. At the end of the day, you must manage the tools effectively or they will undermine what you want to achieve.
Tom Russell is Director of Financial Reporting for Health Care REIT, an S&P 500 real estate investment trust.
Read more in the Fall Financial Planning & Analysis newsletter.