By Jim Wong, CPA | February 18, 2015

Planning is bringing the future into the present so that you can do something about it now. — Alan Lakein

The thought of looking into a crystal ball and being able to perfectly predict the future sounds ambitious and whimsical. Yet, as the real world comes into play, it becomes crystal clear that forecasting in the business sense is a very real and essential component for companies and their business models.

Companies need to have a solid grasp on upcoming revenue streams and profit margins, and finance professionals are the drivers behind that data. It takes proper processes in place for the finance function, and the company as a whole, to accurately report on future, or not-yet-existent, results.

A recent white paper published by and the IBM Software Group, Five Advanced Practices for More Robust Forecasting, discusses various factors involved in developing advanced capabilities for forecasting. We took some of the information provided in the white paper and included some insight of our own to come up with our five practices for developing forecasting success for accounting, finance and IT managers.

1. Improve your processes
A good foundation has to be in place before you can start forecasting financial information. Having a solid grasp on your operations, processes and systems is a key component. Often times, operational improvements come only after a pitfall or infraction has occurred. Be proactive to capture “future ready” information ahead of anything unfortunate happening.
2. Employ knowledgeable professionals
Committed and specialized accounting, finance and IT professionals can add value to a company and its forecasting abilities when they’re able to focus on advanced forecasting practices instead of constantly – as the white paper calls it – chasing down data. Further, accounting, finance and IT managers who can knowingly assess what they “believe” might happen down the road are crucial to generating robust forecasting results.
3. Use advanced technologies
The difference between companies who are competent in their forecasting abilities versus those who are advanced in their capabilities is dependent upon various factors of their analyses. Those who engage in a comprehensive analytical tool such as a Predictive Logic Diagram (PLD) are able to capture key performance outcomes, such as net revenues, throughout various sequenced activities. The deconstructed data from the PLD forces accounting, finance and IT managers to think more like operating managers and consider other activities to focus on that they may not have done previously.
4. Activate scenario planning
Often times the finance function spends a lot of time, energy and resources looking backwards in order to determine what will take place moving forward. Planning scenario-based results will help businesses identify opportunities and risks earlier on. This can help a business respond and adapt accordingly. Accounting, finance and IT managers who produce a “What-If” environment help to manage worst-case scenarios and other playbook situations that will allow the business more leverage in their forecasting.
5. Utilize Monte Carlo simulation
According to the white paper, the Monte Carlo simulation is sometimes referred to as the opposite of the “What-if” environment: “A random sample of probable estimates is calculated in the model, yielding hundreds of possible outcomes. These results provide the probabilities of different potential outcomes.” This type of simulation takes longer to set up, and careful evaluation of the variables in the calculations must be considered, but in the end they provide more robust results for accounting, finance and IT managers.

What are other practices to develop in order to effectively forecast? Comment below and let us know!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.