CFOs Get Ready: The Pandemic is Changing Financial Forecasting for the Better

We learned a lot of lessons from the pandemic when it comes to financial planning and forecasting. I believe these lessons culminate into the big idea that financial forecasting needs to change for the better. Is it because it simply must? Maybe. But we know that most organizations cannot sustain pre-pandemic financial operations methods if they want to succeed.

When the pandemic hit, many organizations had to decelerate operations, stop producing, or cut hiring. Or, conversely, companies that were selling the hottest new “work from home” products or an at-home workout tool like Zoom and Peloton experienced a sudden surge – they needed to detect and harness the moment and speed up operations. Or late in the pandemic many companies couldn’t get raw materials to assemble products – they needed to know how many units to order, what the backlog was, how prices were fluctuating – impacting sales and cost. Emerging from the pandemic – sales backlog grew, and business picked up –frontline teams had to be right-sized to support this. If any of these scenarios sound familiar, you know that these types of slow-downs or speed ups happen instantly. You can no longer wait until financials post to the general ledger, the forecast updates, you look at the results, and then course correct. By then, it’s too late.

You Can’t Guide Your Organization by Looking in the Rear-View Mirror

When you use general ledger data as the primary input into your forecast it has two major flaws:

1. Untimely data – it can be weeks or months old by the time it gets to your forecasting process
2. It is overly summarized into a financial perspective of profit & loss statements/balance sheets/cash flow statements

With more sophisticated financial processes, some organizations can combine financial trends with operational measures like orders, shipments, or units produced. Even still, using volumes that are a month or more old does not help your front-line managers speed up, slow down, hire more, order more, make more – you really need this week’s, or today’s, or this hour’s information to feed into the process to constantly evaluate trends and course correct.

The pandemic taught us that we must change planning and forecasting process to a process that:

1. Detects change using real-time operational signals
2. Stops using general ledger financial data as the primary input into the forecasting process
3. Empowers frontline managers to plan

Empowering Frontline Managers

You can create a modern, agile financial planning process that leads the organization, empowers your front-line managers throughout the business, and reduces the time it takes to create a budget or forecast.

Does your organization finish next year’s budget two-months into the new year? Are your managers battling over pennies? Budgets and forecasts are tools to guide the organization and from their very definition are imprecise – too many organizations waste thousands of hours to create something with the appearance of precision – but is meant to be a forward-looking, imprecise tool. All the work and effort your team goes through to create the perfect budget or forecast goes out the door when a big event occurs like a pandemic, a sudden shift in demand, negative social media posts, etc.

Too often forecasting and budgeting is structured to serve the executive teams and not the operational teams that run the business. Financial forecasting should add value to the business managers. Leadership should be able to glean the information they need to run the business as a by-product of a planning process that involves front-line managers.

Too many organizations forecast using financials or an aspirational number they have grabbed out of the air such as increasing sales 5%, and then back into operational decision making – forcing-feeding financial targets to operations. Let’s flip it—ideally you need to structure your forecasting process by focusing on operational managers first. Give them something of value that helps them run their organizations and use technology to let them know when a big event occurs. Let them address the issue – either accepting the deviation (e.g., I need to change my financial forecast) or keep the financial forecast (e.g., I need to change my operations). These operational changes should drive a nimbler and more proactive financial forecast without having to resort to using spreadsheets for what-if scenarios.

Real-World Strategies to Implement Modern Forecasting

The secret to flipping your forecasting process upside down and empowering your front-line leaders across sales, production, fulfillment, R&D, IT, legal, and more functions is to create planning processes that are built around their operational areas in their terms.

Gartner calls this sort of integrated supply and demand planning across an organization eXtended Planning & Analysis (XPA). At Alithya we call it Connected Planning. The beauty of Connected Planning is that each operational area plans in their language of units, shipments, people, hours, FTEs, costs, and the system translates and consolidates these languages into Finance’s lingua-franca of P&Ls, balance sheets and cash flow statements.

Connected Planning eliminates planning in silos: production is dependent on understand the anticipated sales forecast, purchasing needs to know productions plans, HR needs to understand if sales are growing or slowing by area to understand how to right-size hiring, and more. The interconnection between the needs of each functional area can be modeled in a modern cloud-based forecasting tool. As one area needs more supply of labor/materials/units – another area receives a demand request.

Enabling Real-time Operational Data

For Connected Planning processes to be beneficial and useful daily – you need to incorporate real-time data. For IT, this may be a project management time keeping tool. For fulfillment, it’s the number of orders in backlog, or number of available people from the HCM system. For sales, it might be the sales pipeline from CRM. These operational datasets need to load into your cloud forecasting tool continuously and alert you when operational data diverges from your forecast. Managers can then receive notifications from their phone, Slack, Teams, or other tools to let them know if there is an event requiring review, 24x7x365. In the past, managers would be able to log into the forecast and adjust during a one-week period each quarter—planning in a spreadsheet the rest of the time. With Connected Planning, you can continuously plan with real-time data.

Eat the Elephant One Bite at a Time

Modern cloud forecasting tools are designed to be modular, allowing you to define the interconnection points. It’s best to phase the process in over time. We recommend that our clients start with an area where they can see a quick win, such as the fastest growing line of business, or the area which is most acceptable to change, and go from there.

Ready to take the next towards connected planning? Schedule a discovery call today and we'll help you understand where you are with connected planning and what your next steps should be. After our call, we'll send you a complimentary copy of The Nine Principles of Agile Planning, authored by Alithya's dynamic forecasting expert and Oracle ACE David Pabst.

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