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Companies now have access to more information than they know what to do with, yet the largest and most established brands still miss the mark in reaching their earnings projections. Corporate finance teams are struggling to see the light at the end of the tunnel. In fact, 49 percent of finance professionals believe their organizations are exposed to greater earnings uncertainty today than they were three years ago, according to the Association for Financial Professionals.
Relying on the past to plan for the future
Many companies first look to past internal data when trying to predict and plan for the future. Historical trends certainly provide insight; however, projections relying solely on this kind of data do not account for the potential impact of the future: economic volatility, ever-changing consumer preferences or industry trends. For this reason, financial forecasting should incorporate the external, future-focused factors that impact a company’s performance most.
The benefits of utilizing such data are significant. A study conducted by the Stanford Graduate School of Business found that enterprises that use external leading indicators typically see a 2.95 percent higher return on assets, and more than a 5 percent higher return on equity. Once these factors, or external leading indicators, are identified, finance teams can focus on planning ahead instead of looking to the past by leveraging the right data to gain accurate insights.
Failing to include the right external factors in forecasting
External factors and economic events can significantly impact financial results - like a snowstorm that halts manufacturing production and deters customers from shopping brick-and-mortar retail. Beyond the weather, leading indicators such as currency changes, high unemployment rates and the price of oil all contribute to operational, marketing and sales performance.
However, CFOs today are often overwhelmed by big data. Determining which indicators actually drive an individual company and industry is key to making all of this data relevant and actionable. By arming the C-Suite with a more accurate view of the future by accounting for external factors, CFOs are empowered to drive better decisions across the entire organization.
Even with forecasts that account for external influences, CFOs need to ensure financial projections are met with strong performance at the end of each quarter. With the ability to analyze and interpret global data in real-time, data teams can alert CFOs about significant changes ahead. Executives can then be more proactive in resolving unexpected challenges rather than taking a reactive approach to unplanned events.
Enhancing processes across the organization
Since closing the gap in earnings uncertainty depends on better anticipating the future, finance teams must change their processes for obtaining fact-based industry insights. CFOs can then ultimately lead the charge for better strategic planning, budget allocation and forecasting across their organization. To ensure necessary changes are implemented successfully, finance leaders should follow these five steps to assess their company's current situation and provide the appropriate guidance:
1. Evaluate the current state of the organization. Understanding the current state is an essential first step to determine the most manageable changes required to achieve data-to-insight processes improvements. During the evaluation stage, consider the team’s data source(s), how much time team members are investing in collecting, analyzing and interpreting data, as well as their level of involvement in strategic and operational decision-making.
2. Focus on High Level Metrics First. Following the current state assessment, create a plan to introduce data-driven change across the organization. Avoid the “analysis paralysis” trap with massive data by directing teams to focus on high level metrics first, with the easiest accessible insights that can be understood across the organization. From there, teams will easily be able to prioritize focus areas that are more granular and impact smaller business units. Attempting to tackle insights specific to sales, marketing and operations all at once, for example, creates confusion, frustration and can be overwhelming. From the broader, high level focus, the next areas most in need of industry intelligence and insights will announce themselves organically.
3. Set attainable, meaningful goals. The next step is to solidify and communicate goals that are specific, measurable, attainable, realistic and most importantly - meaningful to the organization. For some companies, even a 1 percent improvement in forecast accuracy could have a significant impact to the bottom line. Additionally, goals may also be process-driven, like increasing the efficiency and speed of gathering data to develop forecasts. Communicate the future state of the organization with a focus on the value and benefits to come from the changes being implemented at the beginning and throughout the process. This will help drive meaningful goal-setting to ensure that changes are consistently delivering value.
4. Leverage partners for heavy data analysis. Technology plays a substantial role in managing the necessary changes to become a truly data-driven organization. Advancements like cloud computing, artificial intelligence and machine learning have evolved to discover the kinds of data an organization should leverage. Technology also enables companies to reduce the time it takes to analyze millions of global data sets. Reducing analysis from several weeks down to mere minutes further empowers finance teams to focus on best leveraging insights to provide accurate answers to executives’ questions.
5. Maintain consistency across the organization. Following implementation, it is important to encourage participation for future forecasting initiatives and solicit feedback from all business units and teams to ensure change is successfully implemented. Miscommunication and inconsistent processes can quickly lead to error, as significant data analysis process changes are implemented across the organization. Therefore, it is important to consistently keep business units and data teams focused on both the meaningful end goal and the next opportunity for forecasting ROI.
Looking ahead with confidence
Despite the prevalent earnings uncertainty felt by CFOs, companies today do have the opportunity to accurately predict and proactively prepare for the future. Those that adopt the necessary changes to improve their data analysis and forecasting processes across the organization will be more empowered to meet earnings projections. By ensuring their teams are empowered to identify significant, unplanned changes ahead, CFOs can focus on the future with certainty and ultimately, gain confidence from stakeholders.
Rich Wagner is the CEO of Prevedere.