Covid-19 and its impact on economies has led to caution in spending with businesses switching to survival mode. As the last year has shown, financial forecasting can be subject to unforeseen changes in circumstances that require different strategies with little notice. This is where agility in forecasting is vital, and data is a crucial piece of the puzzle. With this in mind, how best can organisations plan ahead with their finances? Visma | Onguard CFO Raymon van Viegen writes
Accurate financial forecasting was previously a one-year projection for CFOs, but now, many are looking to forecast one to three years ahead in order to better predict the positions their businesses will be in.
While a longer-term view is beneficial, supplementing this needs to be the ability to adjust within a three-month window to any mitigating external factors. Making tweaks within this timeframe means organisations can negotiate new contracts with customers and suppliers to counteract the negative consequences of decreased trading between businesses during a time of recession.
During periods of economic uncertainty, it is also likely that financial forecasting and the role this plays in the wider business receives greater scrutiny from the board, with leaders looking for robust financial information to drive decision making. In order to enable agility within financial planning, the importance of access to real-time data and actionable data cannot be understated. Such is the pace of change in the financial industry that data that is even six weeks old may not provide an accurate picture.
To have access to the relevant data required in a timely manner, organisations must ensure that internal systems are connected consistently across departments, with a common understanding of what drives future forecasting. With many organisations globally still working from home, and hybrid approaches to remote and office working looking likely to continue in the future, great emphasis has been placed on digitisation models, but there is still work to be done.
Technology that enables better management and visibility of financial data is key to ensure businesses have access to more accurate performance figures to define their forecasting models. As digitisation moves forward, the potential of AI fed by accurate data from across the business could in future help organisations plan ahead for possible future crises. However it is clear that this is still a developing area for many businesses, with the majority of those working in financial services not using any form of AI in their current role.
The human element
Despite the important role technology has to play, it is crucial for organisations to remember not to rely on this alone to ensure agile forecasting. The human element remains key, but the change is in taking a collaborative approach and leveraging all available talent instead of gatekeeping the knowledge between senior leaders.
Organisations must also learn from industry experts and monitor external factors to feed insights from the current landscape into their financial forecasts. While it is likely that we will see technology-powered data insight driving 90% of financial forecasting in the next three to five years, expect to see the human element still playing a crucial role.
A perfect comparison for this is the unique role that humans play in the accounts receivable process when communicating with customers. While data can give a real-time picture of a customer’s outstanding payment situation for example, it is crucial for a finance professional to make an informed decision based on personal circumstances. Similarly, human experience can provide unique insights and valuable contributions as to how the financial industry will change or develop in the coming years, which data cannot provide on its own.
What is clear is that the role of the finance professional will develop, with fresh focus on skill sets such as data literacy and analytics.
The need for agility
Undoubtedly, insights from data and human expertise play a vital part in effective financial forecasting, along with the enhancements of new technology in the coming years. What organisations need to keep in mind, however, is the potential for external factors that cannot be planned for, as we have seen in the last 12 months. Here, a business that has factored in the need for agility will stand out.
To ensure this level of agility, organisations need to automate repetitive processes and ensure employees’ roles are focused on the key decision-making areas of the business, allowing them to place priority on negotiating terms with suppliers and customers that can be adjusted quickly and efficiently in the event of an external crisis to help deal with a new situation.
Making small but incremental changes such as these can help ensure success, and the sum of these improvements can lead to increased agility throughout every department in the business, removing the need for large-scale changes that can prove disruptive to financial forecasting.