5 Indicators That Your Company Needs A Finance Transformation – Financial Forecast Cycle Time (Part 2 Of 5)
This is the second in a 5-part series of articles that will help you identify if your company needs a Finance Transformation.
The time it takes to turn around a Financial Forecast could be the difference between life and death for some Companies. The need for rapid scenario iteration can support executive decision-making regarding capital budgeting, market penetration, inventory/resource allocation, and many other critical business decisions.
Getting timely, accurate, forecasted financial information allows a Company to make educated decisions that drive and sustain long-term value. Which is why Financial forecasting continues to be a high priority for many CFOs. In this context, Financial Forecast does not refer to a budget but a financial iteration or scenario. For example, a budget could be set once a year and take anywhere from 30 days to 6-months to finalize. A Financial Forecast may leverage the data within the budget but makes assumptions regarding future performance that is modeled over a predetermined time period and used to drive management decision making including the identification of new opportunities, mitigation of risk and the matching of revenue and expenses.
How Fast is Fast for Financial Forecasts?
Leading organizations can generate a new financial forecast within 8 days or less while the slowest taking 16 days or longer1. Assuming a re-forecast is done monthly, and that each day takes the equivalent of an FTE, an 8-day difference between the top and bottom performers is the equivalent of over 3-months of work (8 days x 12 months = 96 days). This is time that is not used on the production of analysis, insights and initiative execution.
In order to be an effective management tool, a Financial Forecast does not need to be accurate, but it should be reliable (unbiased).
Why does the Financial Forecast Cycle time even matter? Because it is a significant indicator of Management effectiveness. The speed of Financial Forecasting allows a Company’s Management to take action before the next forecast cycle comes around. A Financial Forecast cycle should incorporate a Company’s known risks, opportunities and lead to action plans that address both.
Generally, any organization that takes longer than 12 days to generate a financial forecast, or more specifically, only does an annual budget cycle, may indicate that the organization needs a Finance Transformation to remain competitive in its market.
The Movie “Minority Report” and the Difference Between a Predication and a Forecast
In the blockbuster movie Minority Report John Anderton (played by Tom Cruise) leads a team of futuristic law enforcement officers arresting and incarcerating people based on predictions of the future made by a group of individuals that possess a psychic ability to see the future, known as Precogs. Everything is going great until one day the Precogs predict that he (John Anderton) will commit murder. This prediction sets off a chain of events in which Mr. Anderton tries to find a “Minority Report” that identifies potential alternative futures which would exonerate him. The existence of a Minority Report shows that the Precog’s visions are not predictions at all but actually forecasts.
The difference between predication and a forecast is that a forecast is a statement of what you think will happen based on certain assumptions while a prediction is what you think will happen regardless of any actions you take. Since a prediction is unactionable, a perfect prediction is perfectly useless for business decision making.
The difference between a forecast and a prediction frequently leads to confusion and leads to the debate that since Financial Forecasts are never accurate, why would Management ever use them to drive decision making? As stated above, if Financial Forecasting was meant to be a prediction, then the output would be perfectly useless. For those that wish to debate this topic, they have already missed the point of Financial Forecasting.
On the other hand, a Financial Forecast is as flawed/accurate as the assumptions used to create it. Just like in the Minority Report, careful attention must be given to what Company Management is expecting and getting from its FP&A team. All senior leaders want the same thing – They want to know the most likely view of the future based on the most recent information available so they can take action to alter it, if desired.
The speed of a Financial Forecast cycle time and the number of Financial Forecast iterations possible, the more time a Company’s Management has to impart its will onto the future through its actions. Financial Forecasts can both help a Company plan for the future or shape a different future of its own making.
To learn about the foundational elements of creating a financial forecast visit Financial Forecasting I: Introduction to Forecasting.
1 Metric of the Month: Cycle Time to Prepare the Financial Forecast
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