For many businesses, accurate budget forecasting and what-if analysis is hard to achieve. Either these companies are still using tools and models long outdated by rapid advancements in technology, or they do not possess the expertise to make consistent adjustments throughout the year. If you fear that your company may be in a similar position, maybe it is time to switch to a more modern, efficient business forecasting method.
Gone are the days of manual spreadsheet creation. Not only are these systems prone to errors, but they also require countless additional hours of paid labor. With numerous Excel spreadsheets requiring constant updating, approvals, and consolidations, it is no wonder incorrect data inputs frequently arise.
Using data you have already gathered from your business’s performance throughout the first quarter of the year, to determine the accuracy of your quarterly forecasts you will need to gain answers to the following questions:
- Did your quarterly numbers match your forecasts?
- What were the quarter’s unexpected expenses?
- Could the unexpected expenses have been forecasted and accounted for with a different financial planning strategy?
- Does your cashflow match its forecasted levels?
Generally, a disparity between your expected numbers and your actual performance will determine that you may need to switch to a more reliable budgeting and forecasting system.
Understanding Rolling Forecasts
Rolling forecasts are rapidly replacing traditional, static budgeting methods. Instead of remaining constant throughout the year, the rolling forecast will “update” itself based on recorded YTD financial results, the initial budgets, and new revenue and expense forecasts. Essentially, the rolling forecast allows the business to adapt its performance strategy to changes in the market, overall economy, company leadership, and management. Rolling forecasts will usually span a period of 4 to 6 upcoming quarters.
What-if Scenarios & What-If Analysis
In project management, it is typical for unforeseen occurrences – either good or bad – to have considerable effects on company revenue, expenses, and overall performance. What-if scenarios predict and quantify the likely impact of a specific situation on a pre-set objective. For instance, a common what-if scenario would consider how a company’s refund requests, additional expenditure, and sales revenue may be affected by a delay in delivery. Another common what-if scenario would be forecasting how extending work durations may affect overall performance and even net profits.
The Benefits Of Forecasting And What-If Analysis: Why These Techniques Are Important
Effective planning can enable businesses to prevent significant additional expenditure, market share and customer confidence losses, and even bankruptcy. Small market changes are accounted for in traditional market planning. However, the what-if analysis is the most (and arguably, the only) comprehensive assessment of potential results of any plausible changes in factors influencing company performance. This system has an array of benefits.
1 – Being Prepared
What-if scenarios allow businesses to find answers to questions before they are posted. Unforeseen circumstances can lead to unexpected peaks in demand or changes in supply costs. For example, a what-if scenario may ask what would most likely happen following the labor force strike leading to a set increase in labor costs. The analysis process will provide you with a reliable answer, which will allow you to prepare for this situation adequately. With the early heads up, a company’s leadership can pivot into the required strategy to tackle any given incident.
2 – Risk Management
Leading a business requires establishing a strategy based on risk. The extent of this risk will depend on pre-set goals, the business’s industry, and existing forecasts. The more detailed these forecasts, the more effectively a company can maneuver through reasonable or considerable risk without encountering business catastrophes such as bankruptcies, massive stock losses, and defaulted payments. This is likely to prevent unexpected stock crashes, as experienced before the Great Depression.
3 – Identifying Key Influences And Drivers
Rolling forecasts and what-if scenarios will give you insight into driving forces that strongly impact your company’s performance. Consider a case where what-if scenarios, pertaining to existent volatility in labor supply, suggest that mild changes in the labor costs may strongly impair a company’s income. This scenario would indicate that the company in question will need to prioritize their relationship with their labor force, as it is a key performance driver.
For more qualitative, detailed information, you may want to consider downloading a comprehensive ebook on effective financial planning. This reading will allow you to expand your knowledge on overcoming forecasting obstacles, how to hit your forecasting targets, and designing a forecasting process best suited to your enterprise or company.
The History And Evolution Of What-If Scenarios And Rolling Forecasts
With our history’s rich trading and business history, it is no surprise that the first linear financial forecasts date as back as the middle ages when the Italian accountant Franciscan de Pacioli coined the double-entry accounting system. Fast forward to the 20th century, and this recording system has been used to create linear graphs predicting the performance of businesses with surprising accuracy. At the beginning of the 21st century, however, Finance experts like Paul J.H. Schoemaker began to point out the failures of this simplistic system to consider qualitative differences in social events.
This highlighted the need for a scenario-based approach, which was rendered accessible by the last decade’s move away from spreadsheets to a cloud-based system. This system has now been asserted as the most reliable tool to increase strategic agility. Rather than producing one strategy based on one linear scenario, it creates multiple approaches to the same goal, consistent with potential changes in performance drivers.
How Technology Supports Forecasts and What-If Analysis
What-if scenarios are extremely difficult to carry out using a traditional spreadsheet model. In the past, experts with a sophisticated understanding of the formulas and algorithms of business spreadsheet tools had to be hired to conduct simple what-if analysis. However, even experienced accountants and finance experts will struggle to make changes as minimal – yet influential – as 10 percent sales increases in particular divisions, or a 3 percent decline in another. The use of spreadsheets isn’t just impractical; it is error-prone.
Planning and budgeting software, on the other hand, have made it much easier to carry out simultaneous simulations running countless scenarios against an array of changing variables. These technologies rely on cloud storage of huge stocks of data to perform predictions in no time. This diminishes the need for bookkeeping and forecasting expertise while maximizing the resulting accuracy and scope of garnered information.
How eCapital Advisors Will Help You With Your Forecasting And What-If Analysis
Effective business forecasting begins with expertise, organization, and peak-accuracy software. To implement your forecasting and what-if analysis, your financial advisor will have to conduct the following:
- Thorough budgeting and planning
- Comprehensive business modeling
- Financial consolidation
- Precise financial reporting
eCapital Advisors has been providing fast, intuitive financial planning since 2001. Our team of consultants will help you plan your next fiscal years by anticipating future performance, pulling information from all relevant functions.
Our business modeling process focuses on enabling companies to adapt to foreseeable changes, as opposed to functioning on “rear-view mirror” data. In highly competitive environments, few companies can afford to rely on narrow, unreliable what-if scenarios. This is where our state-of-the-art data modeling system comes in, running in-depth simulations on every scenario likely to affect your business’s performance, as far as six future business cycles.
eCapital Advisors’ financial consolidation process focuses on providing reliable insight, visibility, and confidence in the effective running of your organization. Using purpose-built software, we align resources with technology to provide modern, fast-paced financial planning.
Lucrative and effective decision-making remains the end-goal of all financial analysis. Therefore, eCapital Advisors have established a structure and format of financial reporting which facilitates the analysis of provided data. This improves the reliability of resulting strategies, and our team of consultants ensures your company is equipped with all relevant information to make the best-informed decisions.
With all business strategies, case studies need to be considered to establish the reliability of findings. The Allen Edmonds case study, which monitored the performance improvements of the Allen Edmonds company, found that eCapital Advisors’ centralized data warehouse and secure cloud-based data reporting tool helped to improve decision-making abilities.
The case study also found that a company may be able to cut its weekly reporting time in half by integrating our financial planning systems. This considerable improvement has provided companies like Allen Edmonds more time to focus on the finer factors of their business performance.
A Concluding Note Regarding On Forecasting and What-if Analysis
Accurate business forecasting requires both insight and expertise. Therefore, you will only want to entrust your business’s budgeting in a team of reliable, dedicated advisors with an intricate understanding of modern forecasting methods and software. Robust business planning services do not end there; at eCapital Advisors, our experts are trained to provide you with accessible and precise financial reporting. With our help, we believe that you can make the most fruitful decisions for your business, at a fraction of the labor time and cost of old forecasting methods.
Entrust eCapital Advisors with your business today, and experience a rapid change into 21st-century fiscal efficiency.
Relevant Case Studies
- Improved Performance at Allen Edmonds
- Using software to solve complex modeling needs at Basin Electric Power Cooperative
Relevant eBooks & Webinars
- Forecasting with Your Eyes Open
- Create an Accurate Rolling Forecast Process
- Boost Forecasting Accuracy, Client Success
- Understanding The Difference Between Financial Forecasting and Budgeting
- 3 Considerations For Selecting the Right Financial Forecasting Software
- What is Driver-based Budgeting and Forecasting and Why Do I Need It?
- A Vision for Demand Planning
- Step Up Your FP&A Game With Rolling Forecasts
- Design Your Forecasting Process to Improve Accuracy