Financial Forecasting in the Age of Uncertainty

by Dan Fletcher

As unpredictable events rippled through the economy, finance professionals saw their usual approaches to planning - and their most recent annual operating plans - rendered obsolete in just a few weeks.

©Drepicter/iStock/Getty Images Plus

There’s an old proverb I’ve been reminded of often over the past few years: we plan, and God laughs. Every one of us has likely experienced that feeling quite a bit since 2020. This is the Age of Uncertainty, with everything from a pandemic to political and social unrest and inflation causing immediate and constantly fluctuating changes to how the world works. It’s become more and more difficult to plan anything, whether a simple weekend getaway or a long-term strategy for business success.

For those of us in finance, the Age of Uncertainty really hits home. Not too long ago, accurate financial forecasting was achieved through hard won experience in the FP&A trenches, honing skills on different methodologies and ultimately developing best practices that more often than not resulted in quality projections. Unfortunately, no amount of experience is enough to confront a combination of massive economic shocks that impacted every aspect of every business. And, as these unpredictable events rippled through the economy, finance professionals saw their usual approaches to planning - and their most recent annual operating plans - rendered obsolete in just a few weeks. Just as impactful, CEOs and CFOs who used to be happy with monthly and quarterly forecasts went to demanding weekly or even daily views of what tomorrow might look like.

What we’ve learned in the past few years is that agility is the key to success for CFOs in this brave new world. That’s especially true when it comes to forecasting and budgeting. The world has radically changed, and with it, so have the expectations placed on finance leaders. But it’s not just the need to be agile; CFOs need the tools and teams to enable that agility in this Age of Uncertainty.

Uncertainty, Agility, and Forecasting

Every CFO would be wise to maintain three types of forecasts: budgets, rolling forecasts, and long-range projection models.

  1. Budgets set the upcoming year’s top-line objectives and define the spend and resources needed to attain that revenue. The process of creating budgets is often quite collaborative as finance produces the most realistic and credible budget by including detailed inputs from operational leaders throughout the organization.
  2. Financial forecasts are rolling views of the near-term (6-24 months) future business performance. An accurate rolling forecast allows the business to make adjustments in real-time to achieve company objectives. Forecasts have relatively high precision and confidence and should be driven by operational metrics.
  3. Long-range plans take a 3–5-year view and are used to answer bigger strategic questions such as when to raise capital, where to expand, what markets to capture, and how to get there. The near term should be similar to your rolling forecast, but the out years are influenced by assumptions, drivers and broader market factors.

What’s critical now, in this Age of Uncertainty, is the velocity of changes to your assumptions. Think about the latest market news and how it drives your costs and revenue expectations: fuel prices, interest rates, worker shortages, inflation, supply chain woes. A minor shift in any one variable can render your plans obsolete overnight. And, just as quickly, things can change again and force you to revise everything anew.

The methodology used to create these three types of forecasts is the same. Your inputs are the same. But your assumptions are in constant flux. That demands forecasting agility, and what brings agility are the tools and processes you deploy to make it happen.

Creating an Agile Forecasting Function

Forecasting agility starts with driver-based forecasts linked to leading business and market indicators. At today’s speed of business, those metrics need to be captured on a daily or weekly basis. But they also need to be quickly integrated into your models - budgets (during the annual planning cycle), forecasts (ideally real-time) and long-range models (monthly). Doing this manually is not long-term viable because that data likely is available in different formats from different sources and you and your team would be constantly tweaking and updating spreadsheets to stay current.

Without real-time indicators integrated into your forecasting, neither finance nor the business will know whether to charge ahead or start looking at alternative scenarios. That’s another must-have for agile forecasting: considering both upside and downside scenarios before they happen. Again, it’s difficult to do in spreadsheets while also having the time to collaborate with the business on creating a thoughtful strategy and operational plan to go along with each of your many what-if scenarios.

Automation is your friend when it comes to agile forecasting. For incoming data, automation removes the risk of manual errors and mistakes, instantly pulls in indicators from a variety of sources (CRM, Marketing dashboards, procurement systems, the G/L) and formats, and tirelessly checks for anomalies and alerts you to outliers. Even better, automation makes updated forecasts, and scenarios instantly available to the finance team, executives, and other decision makers.

When you have driver-based forecasts linked to leading indicators, have considered a range of scenarios, and it’s all automatically updated and distributed, finance has the time to work with the business to determine where the company is headed and what to do about it. From there, finance can provide that information to the executive leadership team and board of directors to make better decisions.

More Agility, Less Guessing, Less Reactive Behavior

Getting the right tools and processes in place takes the guesswork—and panic—out of forecasting. Finance needs agility to see and act quickly, and that requires fast updates of leading indicators, easy what-if scenario planning, and automation to make it all happen quickly and efficiently. The alternative is errors, late and reactive decisions, and finance losing credibility when the business loses faith in your forecasts.

Agility also gives finance freedom from rigid, slow, and quickly out-of-date forecasts, and scenarios that simply can’t keep pace in the Age of Uncertainty. Today’s world demands a plan for a broad range of outcomes because no one knows what tomorrow might bring. Finance can either continue to work in a state of constant panic, disarray, and long hours trying to manage and update spreadsheets. Or you can free up finance to see further ahead, with more confidence, and with more credibility, not because you know exactly what’s coming tomorrow, but because you have planned for all possible outcomes and have the agility to react in real-time to whatever tomorrow brings.

Dan Fletcher is Chief Financial Officer at Planful.