3 Tips To Build An Impactful Business Forecasting Strategy
Building a business is like a challenging team sport. In order to win, you need to have the right people and the right processes in place, but also the right attitude. It’s also essential to have a vision, which acts as a compass for all important decisions during the primary growth stage. But beyond this, and as the business scales, finance teams also need to support the fulfillment of the company’s vision through informed business forecasting, budgeting, reporting and analysis.
According to Darren Glanville, business forecasting is essential for any company, regardless of their growth stage or their industry. As he says, “in my opinion, it shouldn't be something that we just do once. It’s something that should be done on a regular basis. This helps companies stay true to their values and be aware of them.”
Darren is Country Manager UK & EMEA at Fathom, the 360° business management solution, which provides finance teams with insightful reporting, fast cash flow forecasting and actionable financial insights.
And to his point, the last two years and the ongoing crisis have proven that business forecasting can help informed businesses to take advantage of the data they're sitting on, in order to better manage their cash flow, but also to make better strategic decisions.
During a webinar organized by CFO Connect, Darren discussed the challenges of startup forecasting, and shared insightful tips on how to build a business forecasting strategy with the community.
Watch the full webinar replay here:
Table of contents
What is business forecasting, & how can you build a solid strategy?
Business forecasting is nothing new: it has been powering the growth strategy of several, various businesses for decades. This process consists in leveraging data (past and present) in order to predict future business developments. It mainly relies on the capacity of businesses to identify past and present trends in the data they gather.
But this isn’t only about the data itself, as Darren rightly explains during the webinar. Business forecasting also refers to the tools and the technology used to refine a business’ strategy.
Business forecasting: the importance of choosing the right tools
For many finance leaders, business forecasting happens in tools such as Excel. And according to Darren, there’s nothing wrong with that. However, as he explains, “I just think it has certain limitations when it comes to depreciation. We can put a lot of effort and work into using tools like Excel to model events out, but they can very quickly depreciate, and values can be wrong depending on the complexity of that.”
According to him, one of the challenges of business forecasting is about making something complex very simple. And luckily, in the past few years, a lot of offers and new technologies have developed to help finance teams reach this objective.
For starters, as he says, “The rise of APIs over the last 10 years has given us the ability to link disparate systems.“
APIs are not the only innovative products finance leaders can leverage as part of building their business forecasting strategy. Artificial intelligence and machine learning have also allowed some organizations to up their forecasting game significantly.
According to Darren, ”We've never been in such an environment where technology is really pushing us forward. It's leapfrogged us in a way that we can now use this information and data in a way that we've never been able to before. This is where I think businesses are becoming much smarter and this is something that we couldn’t do in Excel very easily.”
New technologies are supercharging business forecasting
Besides helping finance teams perform better, new technologies also make financial analysis more accessible. “Not everyone understands the traditional spreadsheet formats of reports as finance people do. People like to consume data in various different ways. Some people like to consume it on screen. Some people like it in a table, a chart, some people want to have something more tangible in their fingers when they're thumbing through it. There are various ways in which we can do that now thanks to new technologies.”
So, as Darren suggests, these technologies present finance teams with opportunities that they can really leverage. However, he adds a word of caution: “I think that's very important that we recognize that AI and automation really can do a lot of the heavy lifting for us, but some of the analysis needs a little bit more context. And I think there's a danger that sometimes we can overplay the role of automation in some of the prediction algorithms that are out there.”During the webinar, Darren shared his insights on how to build a solid strategy, and the different stages to consider.
Keys to a more impactful business forecasting strategy
1. Clean up the data
For Darren, robust data is the starting point of any relevant business forecasting — it's the underlying pillar of strategy. As he mentions in the talk, “if the clarity of the data isn't sufficient, we're not going to get what we need. Garbage in, garbage out.” In this regard, to his point, ensuring that pre-accounting is correctly done is even more important than the general ledger.
2. Select the right business forecasting metrics to build an impactful strategy
Once the data is ready, the second step towards a good business forecasting strategy is to analyse the relevant data. Setting KPIs and lead indicators is the best way to reach that objective.
As Darren explains, it’s essential to keep forecasting the evolutions of the business as much as possible. “Whether it's a single north star metric, or if we're analyzing several KPIs, we can forecast the number of people we need to hire, the evolution of our assets, the need for purchases... Are we taking loans for those assets and putting those into the system? What payment terms are they, how can we service that debt?”
However, the exercise of forecasting is not solely about figuring out future needs for growth. Indeed, it’s also about being able to anticipate sudden changes in the business’ environment. This way, organizations are more likely to respond and adapt to unexpected events. Darren insists on the importance of creating several scenarios. “What happens if something changes? If 20% of our customer base suddenly disappeared tomorrow, what situation would our labor be in? Can we still service our debts? The ability to look at each of those together and to model those out to see the impact is crucial.”
Business forecasting is all about identifying those future needs and figuring out, with the help of data, how to turn those forecasts into informed business decisions and a consistent strategy. However, data itself isn’t enough - it needs to be turned into insights to enable finance leaders to make good decisions.
3. Turn data into smart forecasting insights
Beyond cleaning, collecting and analyzing business forecasting data, the capacity to identify insights is key for organizations.
Per Darren, “when I talk to accountants about this, or when I talk to their customers about this, this is really where the power of business forecasting comes in. Data alone is irrelevant. It's just giving you signals. Beyond that, we need to create real connections between bits of data and information that we have on customers, invoices, and the products that they buy.”
As he perfectly sums up, finance leaders need to give their business forecasting data meaning, so that it becomes knowledge. And in turn, this knowledge can become the fuel for an actionable forecasting strategy and smart business decisions.
If there’s one thing we’ve learned from Darren’s experience, it’s that even if one may look at forecasting purely from a financial perspective, ultimately, it's about much more. It’s crucial for organizations not to underplay the importance of how they can use business forecasting to model their strategy.
But to build an efficient forecasting model, as Darren said, businesses need to adopt a "garbage in, garbage out" approach. Proper spend management gives you accurate spending data and real-time insights to fuel your forecasting.
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