If we know anything about the last few months then we know it has been an uncertain time.
COVID, Brexit, the possibility of inflation and increased unemployment. So if you are in charge of putting together your company forecasts then how on earth do you cope?
In this article, we’re looking at the problems that face you when you are trying to forecast through rocky periods and what you can do about it.
Is forecasting science or art?
One of the most important things to remember is that forecasts will almost always be wrong.
This is because forecasting is, in itself, an uncertain activity.
You may forecast something as small as a subscription for your CRM, only to find out that the developers put the price up unexpectedly.
You may forecast your headcount with absolute certainty and then someone suddenly hands in their notice.
The truth is that forecasting isn’t binary - it’s not about whether you are right or wrong, just how wrong you are.
This means that to a very large extent, forecasting is more of an art than a science. Sure it looks like science with whizzy software and multi-layers workbooks but at the end of the day, it needs to be laced with quite a bit of intuition to get close to an accurate outcome.
What makes the most difference to a forecast is getting the direction of travel right and understanding what happens if things suddenly go awry.
8 tips for better forecasting
So if forecasting is inherently inaccurate, what can you do to cope with uncertainty?
Well here are our top 8 tips for better forecasting.
Tip #1 - Use systems and apps to do the heavy lifting for you
We would say that, wouldn’t we? But really, if you want to be able to bring in the latest information and produce a well-founded forecast then it is going to take a lot of effort unless you are able to use your systems to help.
We’re not talking about spending millions of pounds buying specialist systems here. This can be as simple as being able to download a bank statement into excel and then produce a forecast off the back of that.
But most accounting systems will have some form of forecasting ability (Access certainly does!) and most will allow you to export information into other packages like Excel or a specialist forecasting app.
So don’t spend time with your calculator, let your systems do the heavy lifting for you.
Tip #2 - Make sure your numbers are up to date
Your forecast won’t get off to a very good start if you are basing it on old data.
Surprisingly this is a mistake that many professionals make and it can reduce accuracy massively.
Try not to build your forecast based on your old forecast which will in itself have inaccuracy built-in.
Instead use a “ground-up” approach, a bit like Zero-base-budgeting and make sure all the data in your new forecast is fresh and as up to date as possible.
Tip #3 - Scan your environment
Forecasts can’t exist in isolation, they need to have a grounding in the real world and this is why environmental scanning is so important.
Some of this can be quantitive data, but much of it will be qualitative and will inform your thinking, especially on your scenario planning (see tip 7).
Typically you may watch things like the unemployment rate to extrapolate how much discretionary cash people have, or the Bank of England base rate outlook to forecast your interest charges.
In fact, any snippet of information that may end up having a knock-on effect is useful here.
Tip #4 - Hold strong opinions weakly
It’s very easy to believe people, especially when they tell you things with absolute certainty.
The sales manager who tells you that they definitely will hit their stretch targets this year (even if they never have before) or the transport manager who looks you in the eye and states that there is no way that fuel prices will rise.
The best advice here is to trust your instincts and the data.
Challenge back; why do they think that fuel will stagnate or sales be better than ever?
If you can’t get a convincing answer then match what people are saying against historical outcomes, and adjust your forecast accordingly.
Tip #5 - Time reduces accuracy
Remember that the further away a forecast position is, the less accurate it becomes.
Producing a 5-year forecast is for the birds (and some VC funders!) because you simply can’t see that far ahead.
If you are asked to produce a long-range forecast then ask why and make sure you attach heavy-duty caveats to the documents you distribute.
Tip #6 - Work out what is important and what isn’t
If time is limited then work out what is important to your company and what isn’t and then forecast that.
For example, some businesses are very cash-constrained and need daily cash flow forecasts simply to survive. Whilst others have plenty of cash, but they need to keep an eye on project spending.
When you look at your forecast, think about the things that make the most impact.
For service industries, this will probably be your people and establishment costs. For online businesses, it will be your PPC and advertising. For a transport company fuel and other transport costs.
Then start your forecast by building these items up.
If you have a million pound a month payroll, then who is really going to care if you get your £25 per month Adobe subscription wrong?
Tip #7 - Scenario plan
Once you have a base forecast then it is time to do some ‘what-ifs’.
What if sales are less than we expect?
What if staff costs rise suddenly?
What if there’s another lockdown?
Understanding what your world looks like in different scenarios is incredibly helpful for risk mitigation and can improve the quality of decision making no end.
The very least you should do is a base case forecast, a best-case and a worst-case.
Tip #8 - Forecast, Forecast, Forecast
This could have been titled ‘ A forecast isn’t just for Christmas, it’s for life” because so many finance teams do a budget or forecast in the week between Christmas and New Year and then never touch it again.
A forecast should be a living document that you revisit throughout the year to produce relevant and up to date outcomes.
At the very least, a business that isn’t awash with cash should have a 30-day rolling cash flow forecast that is constantly updated.
The more you forecast the better you’ll get at it and the quicker and more accurate it will become.
Uncertain times don’t mean uncertain forecasts
Yes, forecasting when the economy is up and down is a really tough gig but for a really good accountant (like you) it shouldn’t be that much of a trauma.
Making sure you regularly forecast with the most up to date information you can get will help, as will producing a couple of extra scenario plans.
Keep an eye on the outside environment and look for things that may skew your numbers and remember that the further away you forecast, the less accurate it is.
And finally, if you are pushed for time then only forecast the big and important numbers and not the fiddly little ones down in the weeds, making sure you use your systems to their full potential.